EUROPEAN COMMISSION Brussels, 25.5.2018 SWD(2018) 259 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a Council Directive amending Directive 92/83/EEC on the harmonization of the structures of excise duties on alcohol and alcoholic beverages {COM(2018) 334 final}

{SEC(2018) 254 final}

{SWD(2018) 258 final}



Contents 1.Introduction and Context 1.1. Introduction 1.2. Scope for reforms 2.What is the problem and why is it a problem? 2.1. Introduction 2.2. Scope of the problems 2.3. Problem 1 - Dysfunctions in the application of exemptions for denatured alcohol 2.4. Problem 2 – Dysfunctions in the classification of certain alcoholic beverages 2.5. Problem 3 – Dysfunctional application of reduced rates 2.6. Problem 4 – Unclear provisions to measure the Plato degree of sweetened / flavoured beer 2.7. Conclusion 3.Why should the EU act? 4.What should be achieved? 4.1. General objectives 4.2. Specific objectives

5.What are the various options to achieve the objectives? 5.1. Link between problems/drivers and options 5.2. Dysfunctions in the application of exemptions for denatured alcohol 5.3. Dysfunctions in the classification of certain alcoholic beverages 5.4. Dysfunctional application of reduced rates 5.5. Measurement of Plato degree for sweetened / flavoured beer 6.What are the impacts of the different policy options and who will be affected? 6.1. Dysfunctions in the application of exemptions for denatured alcohol 6.2. Dysfunctions in the classification of certain alcoholic beverages 6.3. Dysfunctional application of reduced rates 6.4. Unclear provisions to measure of Plato degree for sweetened / flavoured beer 7.How do the options compare? 7.1. Dysfunctions in the application of exemptions for denatured alcohol 7.2. Dysfunctions in the classification of certain alcoholic beverages 7.3. Dysfunctional application of reduced rates 7.4. Unclear provisions to measure Plato degree for sweetened / flavoured beer 7.5. Summary of preferred package of options 8.REFIT (simplification and improved efficiency) 8.1. Context, methodology and constraints 9.How would actual impacts be monitored and evaluated?

ABBREVIATIONS ABV Actual Alcoholic Strength by Volume AFC Alcohol as a Flavour-Carrier AWP Aromatised Wine Products BTI Binding Tariff Information CDA Completely Denatured Alcohol CJEU Court of Justice of the European Union CN Combined Nomenclature CNEN Combined Nomenclature Explanatory Note(s) EMCS Excise Movement and Control System EPC Excise Product Code ET Ethyl Alcohol EU European Union FPG Fiscalis Project Group hl Hectolitre IP Intermediate Products ITEG Indirect Tax Expert Group mn Million MS Member State(s) OFB Other Fermented Beverages OPC Open Public Consultation PDA Partially Denatured Alcohol REFIT Regulatory Fitness and Performance Programme SME Small and Medium-sized Enterprise TFEU Treaty on the Functioning of the European Union WHO World Health Organisation



1.Introduction and Context 1.1.Introduction The European Commission is committed to preventing trade distortions in the single market, ensuring fair competition between businesses, and reducing administrative burdens and compliance costs for businesses and tax administrations. The launch of the single market resulted in the abolition of tax controls at the borders between Member States (MS) and the adoption of common rules for excise products, including alcohol, to facilitate cross-border trade and to prevent competitive distortions. Excise duties for alcohol are regulated through two directives: ·Directive 92/84/EEC on the approximation of the rates of excise duty on alcohol and alcoholic beverages sets out the minimum rates of excise duty on alcohol products. ·Directive 92/83/EEC on the structures of excise duty on alcohol and alcoholic beverages sets out the common rules on the structures of excise duty applied to alcohol and alcoholic beverages. This directive defines and classifies the different types of alcohol and alcoholic beverages, according to their characteristics, and provides a legal framework for reduced rates, exemptions and derogations in some sectors. In addition to these directives, Directive 2008/118/EC sets out the common provisions, which apply to all products subject to excise duties. This directive is currently under review in a separate proposal. Furthermore, businesses must adhere to other EU legislation, which regulates areas such as product definitions, labelling etc. Both alcohol Directives have failed to keep pace with developments including inflation. In 2006 in response to a request from Council, the Commission proposed to amend the minimum rates as set out in Directive 92/84/EEC. The proposal fell short of the necessary unanimity and was withdrawn in 2015 by the Commission. Since the adoption of Directive 92/83/EEC in 1992, the first and only evaluation of the Directive was in 2014. This Directive has not kept pace with the challenges and opportunities offered by new technologies and developments within the alcohol industry. The Directive was identified by the Commission for a retrospective evaluation under the Commission’s Regulatory Fitness and Performance Programme (REFIT). One of the objective was to identify weaknesses in the legislative environment caused by the Directive resulting in negative consequences for the stakeholders (e.g. obstacles to the functioning of the internal market, competitive disruptions, administrative and compliance costs, etc.) This impact assessment intends to ensure that the future proposal is cognisant of previous experiences and in particular identify any areas where the regulatory framework can be improved to bring benefits to businesses, MS and citizens. While a proposal to amend Directive 92/84/EEC may reduce the incentive for tax evasion and positively impact on public health, this impact assessment will not focus on this due to the limited support of stakeholders and the Commission's prior experience in proposing an amendment to this Directive. Furthermore this proposal will focus solely on requirements imposed by tax legislation and not sector / industry requirements. 1.2.Scope for reforms To support the REFIT evaluation, an independent study was carried out in 2014/2016 by a consortium led by Ramboll Management Consulting (hereinafter the ‘Ramboll Evaluation’). The recommendations and findings of the Ramboll Evaluation were taken into account in the Commission’s report submitted to the Council in October 2016. According to this Report, the Directive has proven to be effective and generally appropriate for the collection of excise duties. Nevertheless some problems have been identified and inefficiencies persist causing possible distortions of the internal market. The large variation in duty levels between MS, which provides a strong incentive for tax evasion, and other weaknesses in the design of the tax necessitate the use of burdensome administrative procedures for both tax administrations and businesses. These increased administrative and compliance costs for businesses restrict the participation of small and medium-sized enterprises in intra-EU trade in alcohol and alcoholic beverages.

In December 2016, Member States unanimously supported the call to review the Directive and the Council subsequently adopted Council Conclusions (see Annex 5), asking the Commission to carry out the necessary studies and consultation to submit a proposal for revision. In March 2017, the Inception Impact Assessment on a possible revision of the Directive was published, and laid down the problem areas to be assessed and a preliminary set of potential policy options. A grouping led by Economisti Associati s.r.l. (EA) and including the Centre for European Policy Studies (CEPS), CASE - Center for Social and Economic Research, wedoIT-solutions GmbH, and ECOPA undertook the assignment titled “Study on Council Directive 92/83/EEC on the structures of excise duty on alcohol and alcoholic beverages” (“the Study”). The Study analysed the scale of the problems identified in the Ramboll evaluation, assessed their evolution and assessed the impacts of possible options to address the problems identified. 2.What is the problem and why is it a problem? 2.1.Introduction As noted above, the Ramboll Evaluation found that the Directive has proven to be effective and generally appropriate for the collection of excise duties. However some problems were identified and inefficiencies persist. These findings are evident by the frequent queries from MS and businesses, Indirect Tax Expert Group (ITEG) and Committee for Excise duties (ExComm) agendas, complaints against the Commission and the existence of the Fiscalis Project Group 013 on arrangements for taking forward the work on completely and partially denatured alcohol. The problems touch upon the following 4 areas: (i) Exemptions for denatured alcohol, (ii) Classification of certain alcoholic beverages, (iii) Reduced rates for small producers and low strength alcoholic beverages, and (iv) Measurement of Plato degree of sweetened/flavoured beer. The problem areas are very distinct from each other, which has an impact on the structuring of the analysis presented in this report. There is no uniform and homogenous market for alcohol and alcoholic beverages; the markets for specific beverages or other alcoholic products are generally not competing against each other, follow specific sectorial regulations and requirements, and exhibit specific problems. There are at the same time issues with the functioning of Directive 92/83/EEC which are of horizontal nature, such as the classification problems. All of the problem areas require dedicated scope of analysis. The drivers behind each of the problems areas are problem-specific and so are, mostly, the consequences. As a result, also the objectives are drawn up in such a way that they correspond only to specific problems/drivers (see section 4). Acknowledging the complexity of the issues at stake and their analysis, Figure 2 offers an overview of the intervention logic behind the initiative, guiding the reader through the analysis. Furthermore, it should be noted that some of the problem areas impact specific stakeholders only, who have learned for the main to work within the current legislative framework. The general muted response can be attributed in part to the perceived risks of amending a Directive that is 25 years old, the risk of positive rates for some products and also to the fact that the problem may not impact the stakeholder in any event. Contrary to the apparent lack of interest of stakeholders, this reluctance cannot be generalised and Member States unanimously supported a proposal for an amendment to the Directive. 2.2.Scope of the problems The Ramboll evaluation and the Study took a broad approach to the possible problems, identified through various sources, with the functioning of Directive 92/83/EEC. Follow-up analysis of both studies resulted in a conclusion that not all of the aspects of the problematic areas merited EU action. The excise duty exemption for private production of fermented beverages (i.e. beer, wine and other fermented beverages (OFB)) for home consumption, which was reviewed in both studies, will not be further considered in this impact assessment. The reasons behind this decision are explained in detail in Annex 16. The following problem tree outlines the problems, the drivers and their consequences of the problematic areas retained for further analysis in this impact assessment. Figure 1 –the problem tree 2.3.Problem 1 - Dysfunctions in the application of exemptions for denatured alcohol Overall, the Study suggests that the EU regulatory framework for exempting denatured alcohol from excise duty works relatively well. The original objective behind the provisions – that of ensuring fair competition between businesses - was found to be still relevant. However, it is evident (inter alia from the frequent discussions within the ExComm, the ITEG and the Fiscalis Project Group dating back to 2008) that the provisions in Art. 27 of the Directive concerning denatured alcohol are not phrased in a completely clear and unambiguous way, which has given rise to uncertainties and disputes, especially when denatured alcohol is moved across borders between MS whose interpretation of the applicable rules differ. The original intention of the provisions for exemption of denatured alcohol and in particular the differentiation between the exemption under Article 27.1 (a) and 27.1 (b) is no longer met under the current interpretation. Some of these uncertainties have non-negligible cost implications for producers and/or users of denatured alcohol, and can inhibit intra-EU trade in denatured alcohol. Art. 27 stipulates that alcohol shall be exempted from excise duty if it has been denatured (i.e. the addition of certain substances to make it unfit for human consumption). It distinguishes between ‘completely’ denatured alcohol (CDA), for which there is a system of mutual recognition of national denaturing formulations to ensure it can be traded freely throughout the EU, and so-called ‘partially’ denatured alcohol (PDA), for which the exemption is conditional on its use for the manufacture of any product not destined for human consumption, and MS are free to define their own national procedures. CDA is predominantly used for industrial use, whereas PDA is used for products not intended for human consumption but for which the rules on CDA are not suitable (i.e. because the intentionally strong smell of CDA means it cannot be used in perfumes or its tasting agents cannot be used with products that come into contact with the mouth, etc.). Examples of such products include cosmetics, perfumes, inks, screenwash and anti-freeze, detergents, paints and coatings, as well as biofuels, which account for the largest proportion by far. The key drivers of the problem, which are discussed in Annex 6, are (i) an incomplete / inconsistent mutual recognition of CDA between the MS, (ii) divergent national approaches to PDA, (iii) divergent interpretations of certain terms related to PDA, and (iv) potential for fraudulent use of denatured alcohol. 2.3.1.Consequences: who is affected and how? Member States authorities

Fiscal fraud with denatured alcohol is estimated to result in lost tax revenues in the region of EUR 150-200 million per year across the EU (the bulk of which is in Central / Eastern MS). The World Health Organization (WHO) has published estimates that around 17% of all alcohol consumed in Europe in 2010 was unrecorded. The estimated proportion of unrecorded alcohol (based on data from the Commission's excise duty tables (EDT), 2016) ranges from as little as 3% (FR) to over 20% (RO). Box 1 illustrates the scale of the tax revenues lost in PL. Box 1 - Estimating fraud with surrogate alcohol in Poland The WHO estimates the consumption of illicit alcohol in PL to be about 1.6 litres of pure ethanol pp/year (13% of total consumption). According to interviewees, the illicit alcohol is predominantly spirits (ethyl alcohol), its total legal consumption is about 120 million litres of pure ethanol/year. A project carried out in 2012 by the Polish Spirits Industry in cooperation with the Ministry of Finance found that, between 2009 and 2011, the majority of illicit spirits (7 out of a total of 12 million litres of pure alcohol/year) consumed in Poland were derived from decontaminated/purified industrial alcohol. Based on the current excise duty and exchange rates, this would be equivalent to just under EUR 95 million of excise duty lost per year (or approx. 6% of the total excise duty receipts from ethyl alcohol). Whether this is a realistic estimate depends on who is asked: while the authorities in PL estimate that the consumption of illicit alcohol has fallen to around 5% of the total recently (meaning this type of fraud is responsible for around EUR 50 million of lost revenue/year), some industry representatives reckon the market share of illicit spirits in PL is closer to 20% (equalling approx. EUR 200 million per year of lost revenue). Source: EA, "Study on Council Directive 92/83/EEC on the structures of excise duty on alcohol and alcoholic beverages", 2017 A minority of MS also indicated they felt that the existence of various denaturing methods across the EU made it “particularly difficult” for their administration to monitor and control of the production and/or movement of denatured alcohol. This was mainly due to a lack of knowledge of the different denaturing formulations used by other MS, resulting in a burden on the time and resources available for analysis in the laboratories. According to the CZ and PL authorities alcohol can account for between 25 – 50 % of their customs laboratories' workloads. Recently their laboratories have analysed several hundred samples of denatured alcohol. As a sample can be denatured using one of the many denaturing formulations, the list of ingredients to be checked can vary substantially in each sample making it impossible to establish chemical algorithms. However, only a minority of these samples contain (cleaned up) denatured alcohol of unknown origin. In these cases, testing these samples can reportedly be extremely time and labour intensive i.e. take several days and cost up to EUR 1 000 in staff time and materials. Assuming 500 samples are analysed each year and approximately 5 % of these are difficult cases, the estimated total annual cost for an administration is approximately (a maximum of) EUR 25 000. Finally as described under the drivers, the different approaches to PDA lead to the legal uncertainty and legal proceedings, which have costs for both tax authorities and businesses. In the context of the Ramboll evaluation Member States highlighted the need for clear rules on the exemption of denatured alcohol. One MS noted that the "definitions of rules at this [EU] level is of utmost necessity, otherwise each MS will have its own system, according to its national interests, and that will only complicate matters." Businesses The different procedures and regimes in each MS as regards CDA make cross-border trade more difficult and can create competitive advantages to some, particularly in the cross-border movement of CDA or imports from third countries. However, since extra-EU imports are subject to an import tariff of EUR 10.2/hl, and the value of all imports of denatured alcohol into the EU amounts to approx. EUR 20 million/year of which CDA accounts for a small fraction, no stakeholders consulted raised competition from third countries as a substantial concern either. It therefore seems that it remains more a potential risk than a manifested distortion. Nevertheless, there appears to have been a perceptible hindrance and cost associated with moving CDA cross-borders, as reported by OPC respondents. 9 (24) businesses indicated that they, and/or a company that they had done business or were in direct contact with, had incurred additional costs and burdens because alcohol recognised as CDA in one MS was not recognised as such in another MS, on one or more occasions. A further 8 respondents noted that alcohol was recognised as CDA after a delay. 7 respondents indicated that they or another company had chosen not to import/export CDA from/to another MS because of the risk it would not be recognised as such. With regard to the administrative burden, in general, the main concern of the economic operators was linked to the specific requirements regarding supervision of production and movement in some MS that cannot be directly linked to the provisions of the Directive, and which represent these MS’ national-level response to their estimations of the risk of fraud. With regard to the different national approaches to PDA, while producers noted that intra EU trade in PDA is possible and does happen, the investment required (i.e. purchase of storage facilities, setting up and maintaining tax warehouses) is likely to prevent many. Furthermore the cost of understanding and complying with the applicable rules in the different MS hampers smaller businesses in cross-border trade. For example in the CZ the financial guarantee is approximately EUR 10/L of alcohol. Interviewees in PL noted that it was common for users of PDA to have a full-time member of staff dedicated entirely to ensuring compliance with the regulatory framework, and companies prefer to use CDA wherever possible to avoid the burdens associated with using PDA. Large specialised companies for whom alcohol is a key product often find it economical to make this investment (no detailed cost estimates were available). In addition to the costs of complying with the supervisory regimes and providing the required information to national authorities, there can also be other operating costs that arise from the different procedures in different MS. For example, cosmetics companies in some MS have access to a much wider range of PDA formulations and production procedures (including in situ denaturation) than other MS. This can mean that the manufacture of certain products is possible to a higher standard and/or at lower costs in certain MS. Multinational companies may be able to take advantage of such differences and locate the production of certain goods in the MS that offer the most favourable conditions as regards PDA formulations and related factors. However, there are also instances where multinationals companies in several MS claim to incur additional costs, as they need to adapt the formulations and production processes for otherwise identical products containing alcohol to the respective national PDA rules. The costs arising from the national regulatory frameworks vary significantly from MS to MS, from sector to sector, and even from company to company, and would therefore be very difficult to estimate comprehensively. In any case, the costs arising from these aspects are not attributable to the Directive, but to national implementing rules. In response to the OPC, 57% of respondents indicated that they or a company they had contact with had incurred additional costs to understand the legal situation as regards the applicable rules and procedures for PDA when moved from / to another MS. 68% indicated that they had incurred additional costs / administrative burdens to ensure that PDA using a formulation accepted in one MS was also recognised as such in another MS. 39% of respondents had to pay excise duty on denatured alcohol because a MS did not recognise the procedure by which it was denatured in another MS and 48% of respondents chose not to import or export PDA due to risk it would not be accepted as PDA. No specific estimates or evidence was provided by the MS, which most likely stems from the fact that the administrations or companies do not keep such readily available statistics and disaggregating from other data is difficult. In the context of the Ramboll evaluation, one producer described a situation where a commitment had been made with a customer for the use of a specific denaturant. The authorities subsequently refused to authorise this formulation but the producer was contractually bound to produce the alcohol without an excise duty exemption. With regards to the lack of clarity around the terms Art. 27 (1) (b) and the diverging interpretations of the term 'used for the manufacture of' the different interpretations by different MS, sometimes even by different customs offices within a given MS, of what does and does not constitute a finished product lead to legal uncertainty for businesses and costs (if the classification is challenged). Some businesses (47%) reported having experience of such situations, but were not able to specify costs, and stated the issue was eventually resolved to their satisfaction (in one case via a BTI). In MS where the exemption is not applied, the businesses may have to incur additional costs for purchasing and storing CDA in addition to PDA. The majority of stakeholders (76%) involved in the production or end-use of industrial alcohol stated that they have encountered issues with different interpretations. Consumers/Citizens Apart from the lost tax revenue, the resulting reduced funding for public services and other negative effects of criminal activity on society, the other main concern in relation to the effects of this fraud is public health. There is at least one known recent case in the UK where anti-freeze containing denatured alcohol seems to have been used to manufacture illicit vodka . The consumption of denatured alcohol is also evident in LT, where it is commonly known that mouthwash is sold to individuals for consumption as alcoholic beverages. The Polish National Health Fund data show an average of around 200 hospital admissions, and around 50 deaths due to glycol (alcohol) poisoning per year in PL. 2.3.2.How will the problem evolve (baseline scenario)? Approx. EUR 3-3.5 billion worth of denatured alcohol is used annually in the EU for a variety of industrial purposes. It is estimated that more than 95% of the total consumption is PDA, although CDA accounts for a significant share of the market in certain MS and sectors. With the adoption of Regulation 2017/2236 and the entry into force of the new list of CDA formulations, 25 MS recognise the Eurodenaturant as the only denaturing formulation, with only 3 MS (CZ, SE, UK) recognising different concentrations of the same ingredients. In addition, from 2019, when the authorisation of the remaining FI formulation expires, only 2 MS (CZ, EL) will still be using national formulations containing different denaturants. This greatly reduces, but does not completely eliminate, the scope for problems arising from the manifestly unclear rules on recognition of CDA formulations stipulated in Art. 27(1)(a) of the Directive. Still, it should be noted that the Directive in its current form allows MS to re-introduce national CDA formulations, if they wish to in the future. While this seems unlikely, it cannot be ruled out, especially if issues with the Eurodenaturant were to come to light.

In any case, if one considers that a system is only as strong as its weakest link (as CDA can circulate freely across the EU, and fraudsters would tend to use the “weakest” formulation available), then the fact that many MS have replaced their national formulations with the Eurodenaturant should reduce the risk of fraud with CDA overall. It is impossible to predict if this will result in a reduction of fraudulent activity or in a displacement of fraud towards PDA. The proliferation of national approaches to PDA will continue. It could possibly intensify for biofuels, which accounts for the largest proportion of PDA as the future market evolution of biofuels is dependent on the direction of renewable energy policy in Europe. No changes are expected in relation to the divergent interpretations related to PDA and the uncertainty for cross-border trade will continue. 2.4.Problem 2 – Dysfunctions in the classification of certain alcoholic beverages 2.4.1.The problem and its EU dimension Alcoholic beverages are defined and categorised at multiple levels and for different purposes. These different layers only partly coincide and this lack of coherence seems the single most significant cause of all classification issues. The excise duty classification is determined by the five harmonised tax categories established in the Directive, which are defined primarily with reference to the Combined Nomenclature (CN) headings. See Annex 7 for details. The classification dysfunctions, which can be subdivided into two key areas which exhibit distinct characteristics (and drivers) while sharing most of the adverse effects: (i) interaction between fiscal and customs classification and (ii) definition and classification of certain non-standard products not explicitly, or imprecisely, foreseen in the Directive. The Ramboll evaluation recalled approximately 70 different cases of products “difficult to classify”, spanning a majority of MS. Interaction between fiscal and customs classification The Directive defines the categories of alcoholic products subject to harmonised excise duty in accordance with their customs classification. The correspondence between the fiscal categories and the CN codes is however not straightforward. Within the EU, classification uncertainties have lead to disparities of treatment across MS and between similar products, due to different criteria used to determine the essential fermented character of certain beverages. The level of the legal uncertainty that may derive from the above classification issues is connected primarily to the specificities of national markets, and the classification rules adopted. Under the current system the customs classification determines the excise duty category. Once a beverage is classified as CN 2208 it can be taxed only under Art. 20 (Ethyl alcohol), while if classified as CN 2206 it may fall under Art. 12 (OFB) or 17 (IP) depending on its strength, but not under Art. 20 (unless it exceeds 22% vol., but there are no actual market incidences). Since the excise duty classification follows the CN classification, administrations have limited room for manoeuvre in applying the category that they consider appropriate for products that has a CN code they disagree with. In principle, tax administrations might challenge questionable CN coding decisions, but when these are covered by a Binding Tariff Information (BTI) issued in another MS they generally opt to avoid disputes. The consequence is that similar products may end up being subject to different excise categories depending on the country of origin. The magnitude of the problem is reflected in the number of Court of Justice of the EU ("CJEU") rulings on the classification of alcoholic beverages, which captured some instances of disagreements and disputes over the classification of products that took place in the various MS. In fact, especially where the matter is in the remit of customs offices instead of tax offices, the disputes are reportedly settled through alternative methods: when a misclassification is detected, the competent administration imposes the payment of a certain amount of tax arrears (with/without a fine) to the responsible entity. Businesses prefer this procedure rather than opening a legal case, since it is faster, it often envisages the possibility of negotiations, and it does not imply public disclosure so the potential reputational effects are minimised. However, for this very reason precise figures on the frequency of administrative cases are not available. The landmark rulings of CJEU (see box 2) established the possibility of classifying dubious products and gave MS a tool to tackle opportunistic practices. On the one hand, the CJEU rulings effectively indicated how to interpret the old rules vis-à-vis new products, but on the other hand the selection criteria remained somehow subjective (taste, smell, appearance) or indefinite (no specific thresholds or methods to determine the prevalent origin of the alcohol used). Therefore the risk of disparities in the application of these criteria across national administrations persist, and the need for objective classification rules has possibly become even more pressing. Box 2 – Summary of CJEU landmark cases on the classification of alcoholic beverages Case C-150/08 (‘Siebrand) regarded alcoholic beverages – in specific the three beverages ‘Pina Colada’, ‘Whiskey Cream’ and ‘Apfel Cocktail’ – with a cider base to which distilled alcohol, water, sugar syrup and various additives had been added. The question was if these beverages may maintain the CN 2206 code – due to their cider base – or should be classified under CN 2208 as established by the Dutch customs. The Court ruled that when a fermented beverage loses the taste, smell and/or appearance of a beverage produced from a particular fruit or natural product, due to the above mentioned additions, it no longer falls under CN 2206, but CN 2208 applies. Case C-196/10 (‘Paderborner Brauerei’) concerned the fermented beverage ‘Salitos Ice’ and its ‘malt beer base’. The ‘malt beer base’ was produced from brewed beer with an alcoholic strength by volume of approx. 14%, which was clarified and then processed with ultrafiltration techniques. The base obtained was then employed for the production of a light beer-based mixed drink. The question was if such a product had to be classified under CN 2203 or 2208. The Court ruling established that ‘a liquid described as a “malt beer base”, with an alcoholic strength by volume of 14%, obtained from brewed beer which has been clarified and then subjected to ultrafiltration, by which the concentration of ingredients was reduced, must be classified under heading 2208”. The joined cases C-532/14 and C-533/14 ( ‘Toorank’) tackled the fermented beverage called ‘Ferm Fruit’ and a range of beverages with a ‘Ferm Fruit’ base to which other ingredients were added. Ferm Fruit was prepared using an alcohol resulting from the fermentation of fruit, which was then purified through ultrafiltration so that its smell, colour and taste resulted neutral. The question was if ‘Ferm Fruit’ (Question 1) and ‘Ferm Fruit-based beverages’ (Questions 2&3) had to be classified under CN 2206 or CN 2208. The CJEU ruled that ‘a beverage, such as Ferm Fruit, which is obtained through fermentation of an apple concentrate and is designed to be consumed either undiluted or as a base in other beverages, being neutral in terms of colour, smell and taste as a result of purification (including ultrafiltration) and having an alcoholic strength by volume, without the addition of distilled alcohol, of 16% falls under heading 2208 of that nomenclature’. Source: EA, "Study on Council Directive 92/83/EEC on the structures of excise duty on alcohol and alcoholic beverages", 2017 Definition and classification of certain products Harmonised EU definitions of some alcoholic products exist. In the case of spirits, this harmonised definition was developed to ensure, amongst other things, a systematic approach to spirits, to prevent the misuse of the terms and to protect the reputation of EU spirits. However there is no harmonised definition of cider, perry and fruit wines in the Directive or in other EU legislation. Both in the CN and excise classifications, the OFB definition is less strict than for other alcoholic beverages. This reflects at the same time the heterogeneity of the products comprised (e.g. cider, perry, mead, other fruit-wines, and mixes), the variety of national production practices (‘cider’ designates products with marked differences across MS) or commercial designation of these products (e.g. malt-based alcopops, 'wine-coolers', un-hopped flavoured beer, cider and fruit wine based refreshers, generic low-strength pre-mixes, certain cream liquors and other flavoured liquors, etc.) and the related absence of harmonised sectoral definition and rules that to the contrary exist for wine and spirits. Borderline products have been introduced to the market with the specific aim of being classified in a product category with a lower excise duty rate compared to competing products. Tax differentials vary and high differentials can be observed in MS with a zero rate on OFB. A report shows that certain products that in PL are classified as spirits are very similar to other products that other MS classify as OFB. 65% respondents experience frequent classification uncertainties and disputes within the pre-mixed drinks product group. 62% said uncertainties and disputes frequently occur with the category fermented alcohol pushed to 15-21% actual alcoholic strength by volume (ABV) industrially, bottled and sold to look like its equivalent spirit, on which a higher excise duty is due. This favourable tax treatment, combined with a certain flexibility of the criteria used to define this category, provided in the past an incentive for the development of various new products, based on novel production techniques, arguably designed to take advantage of the OFB tax category for competition purposes. In the absence of a harmonised definition, a number of MS have adopted national ad hoc measures for the tax treatment of OFB. A final element of the classification issue relates to the disparities of classification of certain flavoured wine and OFB to which minimal amounts of alcohol which are not from fermented origin are added as a Flavour Carrier (AFC) or for other functional purposes. According to the Directive, the alcohol contained in a product should be of “entirely fermented origin” in order to be classified as wine or OFB. However, no clarity is provided by the Directive for products containing both alcohol from ''entirely fermented origin'' and ''non-entirely fermented origin'', and the some disparities may arise, regarding aromatised wine products (AWP) or flavoured OFBs. Similarly, the CN 2206 heading admits products not entirely of fermented origin, but the permitted amount is not specified, and the jurisprudence in this area (see box 2) did not establish any straightforward criteria. As a result, various MS have already adopted non harmonised provisions establishing a margin of tolerance for products containing AFC by either (i) adopting a flexible approach to functional alcohol added, or (ii) setting specific maximum limits (in ABV terms) to the amount of AFC that can be added to a fermented beverage before the tax category changes (typically 1.2% vol).

To the extent the tax differential between Art. 12 and 17 and between Art. 17 and 20 is high, there remains incentives for certain businesses to exploit this ambiguity. It is difficult to accurately quantify the size of this market, however 2017 estimates are in the region of 850 billion litres. Approx. 550 billion litres of which are flavoured beer, which does not pose classification issues as Regulation 1967/2005 addressed this issue. However this is a growing area, although moderately, and the risk of abuse may become more relevant in the future. The key drivers of the classification problem are discussed in detail in Annex 8. 2.4.2.Consequences: who is affected and how? As mentioned above, the Ramboll evaluation identified approximately 70 different cases of products “difficult to classify”, across most of the MS. While the consequences surrounding each case are unique (some were resolved swiftly following a few exchanges between the tax administration and the economic operator in question, while others became the subject of lengthy court cases spanning several years), it is clear that all the cases have resulted in additional administrative burdens for the tax administrations (who had to dedicate additional resources to enforce their view of the correct classification) and compliance costs for economic operators (who needed to undertake similar actions to defend their position against either the tax administration or a competitor). An important outcome revealed in relation to the situations documented was litigation costs. Disputes between tax administrations and operators were likely to be taken to court, resulting in significant costs both for the administration and for the economic operators if the financial risk at stake was considerable. Additionally, litigation resulted in significant costs for economic operators seeking to correct the perceived unfair competition presented by “difficult to classify” products. This has been particularly observed in cases when high-strength mixtures emulated or directly competed with spirits or intermediate products which were taxed at a higher rate. Member States authorities As far as the disparities between customs and excise duties are concerned, businesses may be tempted to request a classification in jurisdictions where it is more likely to obtain a more favourable (tax wise) classification, in order to get competitive advantages across all EU national markets. Reportedly, there have been cases of ‘BTI shopping’, i.e. demands submitted in MS where a favourable classification was considered more probable. However, the BTI rules and practices seem to be changing: BTI shopping has become less feasible, and some customs release BTI decisions only to products for export. Still, BTIs are not exempt from disputes, although concrete cases are rare, and customs authorities rarely challenge a BTI issued in another MS. Besides the risk and the costs of disputes, the lack of clear criteria and parameters for certain ‘borderline’ products makes the process complex, long, and unpredictable for all involved. Although it concerns formally the customs classification, it is the consequential excise duty categorisation that is primarily at stake, so the administrative burden caused by CN classification should be considered as directly related to the functioning of the excise duty system. Burdens and costs related to these uncertainties for administrations and businesses vary considerably between MS. The Study estimates the costs at EUR 1-1.5 million/year at EU level. The bulk of the extra burden is borne by national authorities. Eleven MS consulted in the context of the Ramboll evaluation agreed or strongly agreed that the difficulties encountered with the classification of alcohol and alcoholic beverages were leading to increased administrative costs. These costs relate primarily to the additional efforts required to deal with complex classification cases, including laboratory tests and the extra labour to manage the dossier and liaise with the applicant. Unfortunately, none of the eleven MS were able to specify precisely to what extent their administrative costs were greater than they would have been otherwise. As for anecdotal evidence, French authorities reported that 'the dispute on the classification with the producer of a product of fermented base which has been elaborated to resemble distilled alcohol requires nine employees of the tax and customs authorities to be involved'. To cope with the mounting number of 'borderline products' various MS have established ad hoc expert groups responsible for defining detailed classification rules and procedures and ensuring consistency in their tax treatment. Typically, these groups operate at the central level, collating the difficult cases that cannot be solved by regional customs offices. An intensification of the collaboration and exchanges between customs authorities at EU and international level aimed at resolving the uncertainties in the interpretation of the subjective criteria concerning certain CN 2206 products, which also results in costs for MS has also been reported. Unfortunately the customs administrations interviewed were not in the position to estimate the frequency of problematic cases, and the administrative burden attributable to these dossiers. The existence of tax incentives having a product classified within one excise category over another has resulted in the development and marketing of products which seek to comply with the requirements of a more beneficial tax category while arguably (i.e. in the opinion of MS tax administrations and some competitors) circumventing the intention of the legislator of what should fall within the more favourable category. These manufacturers are exploiting the uncertainties and this is depriving MS of tax revenues. However estimates of foregone tax revenues are highly speculative and it is not feasible to determine precisely what share of these products have been developed purely for tax optimisation purposes, or what is the importance of an advantageous tax classification vis-à-vis other factors. Annex 9A presents the results of case studies relating to the classification issues with reported examples of specific products. In a nutshell, depending on the characteristics of the products (e.g. the alcohol content), the determined CN classification, the country in which it is being sold and other individual variables of each case, the differences in applicable excises duties can vary between: ·7.48 EUR/HL to 89.7 EUR/HL of finished product for ready-to-drink products (e.g. alcopops); ·79.55 EUR/HL (a 10-12% ABV, “Irish cream” type product in the UK) to 256.864 EUR/HL (a cleaned up fermented alcohol at 14-15% with sugar, aroma, acidifier, colouring and fizz in France) of finished product for medium strength fermented beverages, and; ·200.00/ HL (a 21% ABV, fermented beverage in PT) to 331.40 EUR/HL (a 22% special fermentation of 'made wine' decolourised and flavour stripped and then sold in Vodka style packaging in the UK) of finished product. The lack of a harmonised approach for beverages containing AFC across MS could lead to adverse impacts on internal market functioning and tax revenues. In the absence of clear regulatory statue for AFC these products may be subject to classification disparities as well. Finally the lack of a separate EPC for OFB is an issue for market monitoring and control purposes due to the lack of accurate data. This could result in the incorrect calculation of excise duty due and the associated financial guarantee required for intra community movements, resulting in disputes (and costs) between tax authorities and businesses. Businesses The Ramboll evaluation concluded that the classification of most alcoholic beverages from an excise perspective was generally seen as straightforward and results in no administrative burden linked to the application of the obligations inscribed in the legislation. At the same time, the stakeholders pointed out that issues surrounding the "difficult to classify" products do however result in increased costs for all the stakeholders concerned; the high costs identified were the result of the complications and disputes arising from situations in which the stakeholders disagree on the correct interpretation of the provisions of the Directive. Nearly 30% of the economic operators consulted in the context of the evaluation reported that they had had difficulties with the assignment of alcohol and alcoholic beverages to the categories of the Directive. Difficulties were noted in all sectors but the beer sector indicated that these difficulties had led to increased administrative costs. The costs implied for each organisation varies significantly depending on the evolution of a given case, the economic importance of the disputes, the willingness of the parties to settle the matter via the judicial system, etc. A representative of a trade association in the area of spirit producers indicated anecdotally that a court dispute over the classification of a product of fermented base with added ethyl alcohol lasted for four years. In fact, only five out of 43 trade associations responding to this question did not report that their administrative costs had increased due to classification problems.

This lack of clarity and legal uncertainties resulted in numerous CJEU cases in the past and high costs for businesses. While the number of cases reduced since the judgment of the CJEU in case C-150/08, there are continued disagreements. However due to the high costs borne by certain businesses, which saw their turnover halved and in some case almost caused their bankruptcy, there is limited appetite for more litigation. In fact, businesses have become more risk wary. Launching new products in the absence of formal classifications may result in increased administrative burden and costs for businesses and delays in getting new products onto the market. According to stakeholders this is a serious issue as other countries' classifications, including third countries, are seldom the subject of legal challenges, thus creating competitive advantages for these businesses. Misclassifications of products may result in higher excise duties for businesses and as a result higher financial guarantees may also be imposed. This may result in substitution effects if the higher excise duties are passed on in full to the consumers. There are conflicting data regarding substitution effects, however the introduction of the 'alcopop' tax in Germany is a classic example of how taxes can have a profound impact on substitution. Box 3 – Possible substitution effects induced by the introduction of the ‘alcopop tax’ in Germany Useful insights on substitution effects between different alcoholic products can be drawn from the review of the consumption trend of alcoholic beverages in Germany between 2000 and 2007. In the first three years of years 2000s, mixed drinks grew in popularity and their consumption recorded an impressive growth (about 78% per year, on average), which partly offset the decline in the volumes consumed of beer and spirits. After the introduction of the alcopop tax in July 2004, consumers and the market responded negatively, and a major decline in consumption was recorded – i.e. amounting to some 50% per year between 2004 and 2006. Looking at the trend in consumption of other beverages, it seems that some previous drinkers of mixed drinks switched to beer as indicated by the slowing down of its declining rate. The existence of a similar substitution effect has been confirmed by a 2010 study to assess the effects of the alcopops tax on alcohol consumption and beverage preference among adolescents in Germany. Based on 2003 and 2007 data from the cross-sectional survey of the European School Survey Project on Alcohol and other Drugs, the study confirmed a partial substitution of alcopops by spirits and beer among 12–17-year-olds. Source: EA, "Study on Council Directive 92/83/EEC on the structures of excise duty on alcohol and alcoholic beverages", 2017 In addition to the quantifiable difference in terms of applicable excise duty as explained above, economic operators interviewed in the context of the case study on classification issues conducted under the Ramboll evaluation, have reported barriers to conducting business across the EU resulting from uncertainty with respect to the treatment of their product (i.e. being treated as W200/2206 in the home country, but considered S200/2208 in other MS). Another negative consequence concerned unfair competition aspects of the internal market; according to economic operators reporting examples of such products, the existence of this classification issue affects competition in two different ways: ·firstly, it places producers of similar products which are entirely from alcohol of distilled origin (which compete on the same market) at a severe competitive disadvantage (see above the difference in duty levels); ·secondly, it undermines the excise category itself by allowing products to deliberately benefit from taxation at the same level as 'clear-cut' products whose protection the category itself was supposed to benefit. Consumers/Citizens The relationship between tax, affordability and consumption at systemic level is in research systematically confirmed weak (see Annex 9). Therefore, the overall impact on per capita consumption of alcohol possibly caused by the tax-induced substitution between ‘standard’ and ‘borderline’ products is considered to be of modest magnitude. This does not evidently deny the existence of problems linked to the consumption of certain alcoholic beverages by certain socioeconomic segments of the population, which have been tackled inter alia through ad hoc national taxes, which was also confirmed by the public health stakeholders interviewed. The lack of a direct correlation between tax policies and per capita consumption seems intuitively confirmed also by noting that the decline in the total alcohol consumption registered by WHO – Global Information System on Alcohol and Health (GISAH) was the strongest for spirits (-2.11% in seven years), but in almost the same period the registered increased in excise duty level was the lowest for this category (+ 2.4%). Nevertheless, borderline products which enjoy a favourable tax classification may appeal to young people or vulnerable social categories with limited disposable income. Increase in the development of borderline products may result in increased consumption and overall create negative public health impacts. 2.4.3.How will the problem evolve (baseline scenario)? Harmonised classifications of alcoholic beverages are of utmost importance for intra EU and international trade. In 2016, the value of alcoholic beverages exports and imports from/to the EU amounted to EUR 24 billion and 4.5 billion respectively. Classification uncertainties of alcoholic beverages may cause barriers to trade, market disruptions and enforcement problems. The Study supporting this impact assessment suggests that the dimension of the categories containing borderline products are limited in volume terms. The mixed drink category amounts to an estimated 78 million litres that is approximately 6% of the ‘fiscal’ OFB category. In a micro perspective, mixed drinks with a fermented base may (and did) represent a cheaper alternative to spirit-based mixed drinks, thanks to the more favourable tax treatment, thus posing a potential competition issue. Classification uncertainties and disputes are becoming less frequent due to the high litigations costs borne by certain businesses. As a result businesses including both brand owners, wholesalers and distributors have become more risk-wary towards the placement on the market of new products if not clearly identified. However the disparities persist due to the subjective rulings of the CJEU and new technological developments will continue to create uncertainties if the scope of the OFB category is not clarified. Businesses are now using alternative methods, for which precise figures are not available. Some national customs have adopted rules and procedures to effectively operationalise these criteria. In FR, a specific platform, i.e. Soprano , has been established to this end. The platform allowed authorised businesses to submit classification dossiers to obtain a preventive opinion in a faster way. The pilot initiative was launched in 2017 and its use at the moment is voluntary, but if successful it might become the standard procedure for the submission of applications. In addition to preventing disputes, the expected benefits of Soprano also include a reduced length of procedures so a shorter ‘time-to-market’ for enterprises. Nonetheless, as the national approaches are non-harmonised at EU-level there remains the risk of different/incoherent legal interpretations and ensuing disputes, as well as incentives to continue to develop products exploiting these classification uncertainties. Competitive advantages will persist for businesses who obtain a favourable tax classification, which will encourage 'classification shopping'. The nature of ‘borderline’ products is different across markets since it relates to specific consumer preferences and opportunities, but in general the problematic area seems to increasingly focus on fermented bases having undergone some form of concentration and/or cleaning, both traded as such or used in final beverages. Cases were reported of products stored in the producers’ tax warehouses as CN 2208, then dispatched to another country as CN 2206; beverages moved in a bordering country, re-bottled and re-imported, with a more favourable classification; trade of entirely fermented bases with ABV of 22% coded as CN 2206 etc. In this respect, the products covered by the CJEU rulings are no longer the core of classification uncertainties and issue, but other new challenges are seemingly emerging. The unclear application of 'entirely fermented origin' and the absence of a separate EPC may cause some market distortions and monitoring / control issues for some products. With respect to future trends, two considerations apply: (i) an increasing number of MS have adopted a flexible approach to AFC, possibly in connection with the EU-level legislation. This trend is likely to continue, since MS that have not set explicit threshold for AFC are reportedly inclined to maintain margins of tolerance in the classification of these products. So disparities of treatment are progressively less likely; (ii) on the other hand, the market size of these products is growing, although moderately, so the risk of abuses may become more relevant in the future. 2.5.Problem 3 – Dysfunctional application of reduced rates

2.5.1.The problem and its EU dimension The scope and application of reduced rates to some alcoholic beverages is a multi-faceted problem, which could be sub-divided into more specific aspects. Whereas the Studies and the stakeholders consulted, globally consent that the reduced rates framework is working, there are issues that are acute to a specific industry or to a specific aspect of the legal framework. Unequal treatment of producers of alcoholic beverages The first sub-problem within the application of reduced rates evolves from the unequal treatment of producers of alcoholic beverages which can lead to market distortions. The Directive allows MS to grant reduced excise rates to small producers of beer (Art. 4) and ethyl alcohol (Art. 22) only; small producers of wine, OFB (including cider and perry) and IP are not subject to this provision. Even if the MS wanted to correct this imbalance, the Directive effectively prevents them from doing so. Ireland and the UK highlighted this unfair discrimination in the Ramboll evaluation. Detailed analysis of reduced rates and special schemes applied to all sectors of alcoholic beverages is included in Annex 10 with key aspects recapitulated here below. When it comes to cider (and perry), in most countries, cider makers are not intermingled in complex relationships, and small cider producers make cider themselves, rather than providing products to larger companies. In terms of market structure, micro and small cider makers represent the vast majority of the population (96% in the UK, 99% in FR, 93% in IE), but a small share of the market. The fortified wines industry includes growers, producers of the base wine and fortifiers. The vast majority of growers do not produce the end product. The number of small producers within this industry, who would be affected by the application of reduced rates is small. For wine producers in MS applying a zero or near zero excise duty rate to wine, the introduction of reduced rates would bring no tax advantage to small producers and therefore the relative competitive position of drinks would not change. This is not the case in MS applying a positive excise duty rate. However in the view of stakeholders, the introduction of reduced rates for small producers of wine could result in the subsequent removal of the zero rate, an outcome which would negatively affect all businesses, both large and small. Taking account of these factors, this impact assessment will focus on small cider makers only. For the sake of transparency and completeness the analysis of reduced rates for small wine producers and fortified wines together with options is presented in Annex 10. Legal uncertainty The second sub-problem area of the application of reduced rates concerns the lack of clarity of the current provision and the legal uncertainty thus created for the markets. The granting of reduced rates to small producers is conditional upon their independence in legal and economic terms from any other brewery and no operations under license. However, the Directive does not define the term 'legally and economically independent' and this has resulted in businesses consulting other EU law to resolve this. With respect to beer brewed under licence, the issue has been largely resolved by existing guidelines and clarifications. Despite this, conflicts on the term 'legally and economically independent' between producers and authorities persist, which require legal proceedings, rulings and therefore litigation costs for both parties. Box 4 – CJEU case C- 285/14: Brasserie Bouquet SA (FR) Brasserie Bouquet operates a restaurant in which it sells beer it has brewed itself. It entered a membership contract with ICO 3B SARL, which authorised Brasserie Bouquet to use the trademarks, the commercial designation "Les 3 Brasseurs" and to receive ICO 3B SARL's know-how. In exchange Brasserie Bouquet paid an entrance fee and was required to exclusively obtain certain products from ICO 3B SARL. Brasserie Bouquet considered it satisfied the conditions of the small brewery relief. The FR authorities challenged the application of the reduced rate that Brasserie Bouquet paid. The CJEU ruled that for the purpose of applying the reduced rate on beer the condition laid down in Art. 4(2) of the Directive according to which a brewery must not operate under licence, is not met if the brewery concerned makes its beer in accordance with an agreement pursuant to which it is authorised to use the trademarks and production process of a third party. The UK businesses consulted confirmed that 'contract brewing' may still have a certain degree of subjectivity regarding whether a contract breaches the independence of each counterpart or not. French stakeholders reported that this issue should have been settled by a Customs Memorandum, but this has led to different interpretations by local customs offices. In terms of the cross-border functioning of the reduced rates for small brewers, MS report implementation problems, as customs authorities in the country where the product is released for consumption need to check the status of the brewer. UK authorities consider this to be a ‘self-declaration’ scheme, so that controls on businesses claiming the status of ‘small producer’ are risk based. In FR, a small brewer must make a one-off submission of a set of company documents. In case of disputes, the customs authority in the MS of destination may submit a request for information to the customs authority in the country of origin to verify the status of a small brewer. This verification may be problematic in the case of businesses based in a non-EU country. However, most of the customs authorities interviewed do require a certificate from the brewers or their distributors, issued or stamped by the home country customs authorities. Businesses interviewed confirmed that, when moving products across borders, the local distributor may ask for such a certificate, but this does not always happen. A problem arises when (i) a small brewer established in a MS not requiring the certificate and not issuing the certificate to domestic manufacturers intends to enter the market of a MS requiring such a certificate; (ii) or when the MS of destination does not automatically recognise the status granted by the country of origin. FR allegedly does not accept self-certification and does not always recognise checks performed by the Belgian customs authority and this is affecting a significant number of Belgian producers. In this regard, BE noted during the Ramboll evaluation that at an administrative level there are a lot of problems regarding interpretation in order to determine the status of a 'small independent brewery'. Even though the reduced excise rates for small breweries are estimated to cover only 5% of production, it is estimated that 95% of active breweries are covered by this relief. The problems described above may be of limited scope today. However with the continued increase in the number of small breweries and their growth into larger businesses, it is likely that cross-border trade flow will increase and the commercial relationships will become more complex. As a result these uncertainties are likely to evolve into bigger issues in the future. The functioning of reduced rates for distilleries meets the same obstacle of an unclear definition of 'legally and economically independent' businesses. The rationale of this relief is to protect and preserve the traditional distilling culture. The distilleries benefiting from the reduction are the ones likely to work on an occasional basis, e.g. after fruit harvesting of grape pressing, selling their products, for the very local market. The threshold was therefore set much lower, making the commercial viability of such a scale of production extremely limited. During stakeholder consultation most of producers in the ethyl alcohol industry expressed a negative opinion on the current threshold. While all considered that it was not fit for purpose the reasons differed. Most stakeholders showed limited, if any, interest in a revision of the threshold and most authorities expressed no intention to implement an amended provision at national level. Taking account of this, this impact assessment will not focus on this problem area. Irrelevant and incoherent alcoholic strength thresholds for some product categories The final problematic area of application of reduced rates relates to low strength alcoholic beverages. Art. 5, 9, 13, 18, and 22 of the Directive allow MS to apply reduced rates on low-strength alcoholic beverages, but the Directive is silent on the targets or objectives of these provisions. More specifically, it is not clear whether the option for reducing rates represents a tool to: i) tailor national taxation policies; ii) pursue objectives of industrial and agricultural policy; iii) incentivise product innovation; and/or iv) achieve health policy objectives. This is not generally perceived as an obstacle to its uptake in MS who are contented with the flexibility offered under the arrangements allowing them to pursue their own priorities and adapt the structure of the excise duty on alcohol to national needs. However the alcoholic strength thresholds to apply reduced rates are set at levels that are largely irrelevant for some product categories, while applicable to the entire market for other products. For example: Wine, intermediate products, ethyl alcohol The current thresholds for wine (8.5% vol.), IP (15% vol.) and ethyl alcohol (10% vol.), do not to reflect the features of products included in these categories. Very few products in these categories could fall below the threshold. In most cases, to comply with product definitions spelled out in EU law, such products must have an alcohol content above the maximum thresholds set by the Directive. Beer The current threshold allows the application of reduced rates mainly to radler and very few other products. It is too low to provide any tangible incentive for brewers to be innovative and create new low-strength products or for consumers to drink low strength beer. OFB The current threshold set for OFB (8.5% vol.), which covers almost the entire market for cider and perry and a portion of the market for fruit wine, appears to pose no policy problem

It should be recalled that the present impact assessment does not touch upon the duty rates of excisable products but the excise duty structure. What is discussed in the present impact assessment is therefore not the levels of reduced rates for different categories of alcoholic beverages, but rather what products they may be applied to and under which conditions, including thresholds. The concerns presented here do not relate to the functioning of the internal market as such – which is deemed to be functioning well given that whatever the national considerations, the excise duty is charged where the product is released for consumption – but to the effectiveness of the thresholds in helping the MS to set national policy objectives. As reduced rates are therefore irrelevant for producers of wine, ethyl alcohol and IP this impact assessment will not focus these products. The key driver of the dysfunctional application of reduced rates relates to the obsolete and unclear provisions of the Directive, which is discussed in detail in Annex 11. 2.5.2.Consequences: who is affected and how? Much of consequences of this problem, particularly with regard to the businesses and to some extent also the national administrations, has been explained in detail under the core problem definition. This is because how some of the stakeholders are affected constitutes precisely the problem at stake in the present impact assessment. To avoid repetitions, this section summarises the main impacts under headings relevant to specific type of stakeholders. Member States authorities The reduced rates for small producers and low strength alcohol reduce the revenue MS collect from excise duties. However, all customs authorities interviewed during the Studies supporting this impact assessment considered that the reduced rate schemes did not generate large costs for the public budget. Similarly, in terms of administrative burdens for businesses and enforcement costs for public authorities, the Studies confirmed that the reduced rates did not require unnecessary efforts, by either businesses or customs. Enforcement costs with respect to domestic producers were considered to be minimal by all tax and customs authorities interviewed. The UK noted in the context of the Ramboll evaluation that reduced rates for small cider makers contributes greatly towards rural economies, has a minimal impact on government revenue and has no adverse impact on intra-EU trade. In the cross-border context, as described under the problem definition, the increase in the number of small producers of beer, their complex business structures and the increase in cross-border trade generates some problems for enforcement and implementation, as national authorities must determine if the producer is entitled to the reduced rates. The uncertainty in the interpretation of 'legally and economically independent' results in legal proceedings and therefore costs for stakeholders. No specific estimates or anecdotal evidence was provided by the MS, which most likely stems from the fact that the administrations or companies do not keep such readily available statistics and disaggregating from other data is difficult. Businesses Findings show that the vast majority of active brewers, 97% in the EU, are eligible for the reduced rates scheme for small brewers and therefore subject to the legal uncertainties highlighted above. This uncertainty may hinder expansion and development of small brewers. The competitive position of small cider makers vis a vis large producers is similar to that of small breweries. However, while small beer producers are entitled to enjoy reduced rates, the small cider makers are not. While the minimum rate for cider is zero, most MS with a traditional cider market apply a positive excise rate. As a result the zero excise rates is only applied to 9% of cider consumption. Indeed, given the industry similarities between beer and cider, the competitiveness of the small cider makers could be explained through the proxy analysis done for the small breweries. The latter, in the course of the studies supporting this initiative, were asked whether reduced rates supported their competitiveness or if the reduced rates were largely appropriated by distributors or passed on to consumers – resulting in a neutral effect on small brewers overall. Small brewers considered that the provision supported directly the competitiveness of small producers as the tax reduction was not passed through the value chain down to the consumers, and that the rebate was effective in counterbalancing lower costs enjoyed by large companies, in particular because of economies of scale and market access barrier. While reduced rates have a clear positive impact on Small and Medium-sized Enterprises (SMEs) competitiveness, their effect on the entry rates in the beer industry is not univocal. There seems to be a trend towards the growth of the micro and small brewery segment, which is, according to businesses’ view, largely driven by market demand, and which is even across countries, regardless of whether they have implemented the reduced rates or not. In FR and the UK, where the discount for microbreweries is significant (50% of the standard rate), their number has more than doubled over the 2010-2015 period (annual growth rate of respectively 16% and 19%). In AT, the number of microbreweries remained stable (+13% over 5 years); however, the discount for microbreweries in this country is significant (40% of the standard rate). In Italy, where there are no reduced rates, the number of microbreweries almost doubled in the 2010-2015 period. While businesses consider that reduced rates support the entry of new players, these data suggest that the provision of reduced rates is neither a necessary nor a sufficient condition, and that other national factors are also at play (again, consumer demand, as well as industry structure, market stability, type of beer consumed by the population, competition from other beverages). Overall the Ramboll evaluation concluded that it is unlikely that the presence of reduced rates creates market distortions by unduly advantaging smaller firms that benefit from the rates. The threshold for low strength beer to apply reduced rates is low and as a result there is little incentive to develop this sector. Beer producers interviewed noted that producing low strength beers cost more than producing standard beers and therefore only certain large producers can absorb this cost. Low strength beer may also taste differently from regular beer due to the ABV. Consumers It is possible that small producers – of beer or cider - who fail to receive the reduced rates due to a different interpretation of 'legally and economically independent' or due to the lack of corresponding provisions allowing for duty reduction, may choose to absorb this cost as it has been described above. However as these are small producers, with tight margins, it could be assumed that the extra excise duty would (have to) be at least partially passed on to the final consumer. The small breweries interviewed for the supporting studies did not seem to confirm this, claiming small brewers are most likely to produce craft beer, as opposed to the mass products mostly marketed by large companies. As a consequence, price levels are different, and this reduces the incentive to pass-on the tax discount in order to remain competitive vis-à-vis larger players. Further empirical evidence is provided by an industry study on British small brewers, where most of the respondents indicated that the excise reduction was kept within the firm (e.g. for investment), and only 12% indicated that it led to a price reduction . As above, it can be assumed that the cider market would behave similarly and is similarly impacted. 2.5.3.How will the problem evolve (baseline scenario) With respect to small brewers, in most of MS analysed in-depth in the Studies for this initiative, the number of microbreweries is growing quickly. Even though the rate of growth is likely to diminish in the future as the market achieves a higher level of maturity, there is no indication at this stage that the phenomenon is halting . So far, the growth in the number of small brewers was not matched by a parallel increase in their market share in the beer market. As such, there is a limited expectation that market effects (i.e. competitive distortions), costs to the public budget, or health impacts would become more prominent in the future. At the same time, as the sector of small brewers achieve maturity and some players grow in size, it is likely that (i) cross-border trade flow augments, so that the not always smooth functioning of the scheme in MS other than that of establishment becomes a more significant problem; and (ii) the commercial relationships become more complex, and more forms of cooperation could be part of the grey areas identified above, if the provisions are unchanged.

With respect to small cider makers, the current imbalances within the markets will remain, should no change to the current situation be introduced. Although the cider industry is small and traditionally EU based compared to other alcoholic beverages, the industry is one of the fastest growing in some MS. As the industry grows, it is likely that players may wish to increase their cross-border trade to remain competitive. This may be difficult in the absence of reduced rates. In terms of the thresholds for alcoholic strengths of certain beverages, many large beer producers are currently launching new beer with alcohol strength of 3.5% vol. Although above the reduced rate threshold these new beers could be considered as a competitive product to the current low strength beers on the market. Some MS (FI, SE, DK, IE and UK) support this extension and other MS pursuing healthier drinking policies may wish to promote this, but the Directive does not favour such objectives. Some other stakeholders argue that the application of reduced rates to low-strength alcoholic beverages may increase alcohol related harm as more affordable products may eventually encourage consumers to drink more. 2.6.Problem 4 – Unclear provisions to measure the Plato degree of sweetened / flavoured beer 2.6.1.The problem and its EU dimension Art. 3(1) of the Directive allows for levying excise duty on beer with reference either to the Plato degree or ABV of 'finished product'. The term 'finished product' is not defined in the Directive and this results in three different interpretations when it comes to measuring the Plato degree of sweetened/flavoured beer (i.e. mixture of beer with non-alcoholic additives or beverages). The addition of sugar/flavour in the beer after fermentation may artificially affect its Plato degree, as the Plato method seeks to estimate the concentration of extract in a fluid as a percentage by weight. The three different methods result in non-uniform measurement of the degree Plato; depending on which approach is chosen. This, inevitably, leads to differences in the excise duty applied to products which can have the very same alcoholic content. Different excise duties will be mirrored in retail prices and consumption of such products. Indeed, some beer producers have reported that accounting for the added sugar when measuring the Plato degree is technically wrong, and can lead to unfair competition among them and in particular in comparison to beer mixes which contain artificial sweeteners instead of sugar; for the latter products the increased excise duty would not apply. The problem has also led to conflicts between beer producers and tax authorities, which require legal proceedings and rulings and entail litigation costs. In Germany, a brewer went to court in 1997 seeking to have its radler (a type of sweetened beer) taxed based on the ‘real extract’ rather than the ‘present extract’ (see Annex 13 for further information on the approaches to measuring the Plato degree of sweetened/flavoured beer). The national court finally decided against the brewer’s pleads only in 2004. Recently, a similar case has been brought to court by a Polish brewer (see Box 5). This case was referred to the CJEU (C-30/17 - Kompania Piwowarska) but only following 12 years of local legal proceedings in PL regarding the way in which excise duties on such beer should be determined. Box 5 - Calculation of excise duty on sweetened/flavoured beer: The Polish case (C-30/17 - Kompania Piwowarska) In this case the national Polish court requested a preliminary ruling concerning the calculation of excise duty on sweetened/flavoured beer. A Polish beer company producing sweetened/flavoured beer disagrees with the Polish tax authority on the measurement method. The different views of the brewer and the Polish tax authority can be summarised as follows. The brewer argues that the strength of the sweetened/flavoured beer in Plato degree should be measured accounting for the ‘real extract’ (method B1) rather than ‘present extract’ (method B2) of the finished product. Including the sugar added after fermentation in the extract figure would be a technically wrong measurement, because this sugar does not add to alcohol formation. By contrast, the Polish tax authority requires method B2, i.e. measuring the Plato degree on the basis of the present extract, including the sugar added after fermentation. The Polish case clearly demonstrates the importance of the problem for both beer producers and tax authorities. By adopting the brewer’s approach, the beer producer (tax authorities) must pay (receive) PLN 87.8, whereas by adopting the tax authority’s approach it must pay (receive) PLN 109.8 (figures correspond to the example provided in Annex 14) per hectolitre of beer. Different interpretation of the way of applying the Plato method to sweetened/flavoured beer can lead to differences in excise duties for the same product. This example demonstrates the legal uncertainty for businesses associated with the co-existence of the different measurement methods, which constitutes an additional aspect of the problems related to the measurement of Plato degree of sweetened beer. The key driver of this problem is the divergent interpretations of the term 'finished product', which is discussed in Annex 12. 2.6.2.Consequences: who is affected and how? Member States authorities MS collect revenues from the excise duties. As shown in Annex 13 and 14, method B2 yields the highest excise revenue for the authorities. Moreover, approach A and B1 generate some problems for enforcement, as national authorities are reportedly unable to measure the Plato degree of the base beer, the real extract or the present extract by analysing the content of the bottled beer; any such checks must be done at the brewery by measuring both the Plato degree of the base beer and the quantity of base beer included in the end-product. In this context, enforcement problems become more prominent when it comes to applying excise duty on sweetened/flavoured beer moved from another MS, as tax authorities could hardly perform checks in breweries based in a different country. Approach B2 was therefore found to be the only one allowing for proper checks by customs laboratories, thus reducing room for tax fraud. It is also the method applied in the majority of the sample MS even though the industry is of the opinion that it is technically incorrect. Finally, as described above, the legal uncertainty and the differences in interpretations lead to legal proceedings and therefore costs for tax authorities and beer producers.

Businesses Some beer producers claim that the discrepancies may ultimately lead to distortions of competition caused by artificially – or mathematically - changing the Plato degree without altering the alcoholic content. There is no market data available which would distinguish the different types of sweetened/flavoured beers while taking into account their methods of production and measurement of the alcoholic strength to confirm those claims. The businesses interviewed in the context of the two Studies regarding the revision of the Directive often did not have readily available or shareable market analysis. A quick calculation of the different excises theoretically applied to sweetened/flavoured beer with alcoholic strength measured using the different methods, nevertheless highlights the disparities of treatment and potential for distortion (see Annex 14 for details). On the other hand, it should be noted that sweetened/flavoured beer producers are free to use sweeteners (e.g. aspartame) to sweeten their products instead of sugar, if they want to avoid extra taxation on the added sugar. Unlike sugar, sweeteners do not increase the Plato degree when switching from approach B1 to approach B2. Tax authorities argue that given that only a few brewers use sweeteners instead of sugar, it shows that the extra excise duty is not a high burden for them. By contrast, brewers explained that the choice to use sugar rather than artificial sweetener is driven by marketing considerations, e.g. using only natural ingredients, rather than by cost considerations, e.g. tax savings. Consumers It could be argued that, in order to keep the competitive edge, the producers of sweetened/flavoured beer may have to choose to absorb the extra cost. Assuming nevertheless the excise duty is consistently passed-on to consumers in the retail price, it would affect the competitiveness of products and the related demand, causing ultimately potential distortion of the market. In any case, the additional cost of higher excise duty would not disappear and would have to be borne by one or the other party. Any change in excise duty reflected in a change in price is expected to impact the consumption of sweetened/flavoured beer. This in turn can, albeit to a minor extent, engender public health policy issues. For instance, sweetened/flavoured beer is thought to be more attractive for women and young consumers, neither established beer drinking groups, which is confirmed by the fact that 40% of radler drinkers are new to the beer category. However, research has shown that marketing plays a greater role in attracting these consumer groups than the actual content/taste of a beer . On the other hand, radler contains less alcohol (2-2.5% vol) than standard beer, so it may be desirable to promote a shift towards beverages containing less alcohol. This would eventually reduce the overall alcohol intake and ultimately result in positive public health impacts. 2.6.3.How will the problem evolve in case of no-EU action (baseline)? Even though the EU market for sweetened/flavoured beer is relatively small – around 2.7% of the overall beer market in 2015 – it is growing faster than the beer market itself, which has actually stagnated in many industrial economies. Sweetened beer is part of a strategy of brewers to innovate and regain market share; even the mainstream beer brands like Heineken or Peroni have introduced sweetened/flavoured beers, and especially radlers, in recent years. The IWSR database reports a market growth by 6% between 2015 and 2016 for sweetened/flavoured beer, and projects a market growth by 8.5% in 2017. A study forecasts steady growth for sweetened/flavoured beer in Europe to 2020. Therefore what may seem a problem of a limited, local scope today, unaddressed could evolve to a much bigger impact on the future functioning of the internal market, even though estimates are not available. The CJEU is called to rule on whether the Plato degree of sweetened / flavoured beer should be measured by considering the 'real extract' (approach B1) or the 'present extract' (approach B2). The awaited judgement of the CJEU on the prejudicial question of the Polish court may contribute to addressing - and eventually clarifying - the policy problems. At the moment, the baseline scenarios will be different for the MS, depending on which method of measuring Plato degrees they apply. Regardless of the ruling, some MS will need to adapt the methods in order to comply with the ruling. The extent to which the CJEU ruling will change the status quo is therefore presently unknown. 2.7.Conclusion It is apparent from the analysis of the problems above that the functioning of the current system for alcohol and alcoholic beverages is causing disturbance to both MS and businesses. These are problems that are exacerbated by the increase in cross-border activity that is the result of globalisation of the economy and the extension of the EU (from 12 to 28 MS) since the Directive was adopted. In some cases this also provides greater opportunities for fraudsters. 3.Why should the EU act? In analysing the problems and the problem drivers it is clear that the Directive in general works well and provides an EU-wide system of uniformity and harmonised conditions that are necessary to ensure the proper functioning of the internal market. Despite the shortcomings described no alternative national, bilateral or other international initiative would provide the same level of effectiveness in terms of the functioning of the internal market and the monitoring and control of excisable alcohol, and significant added value consequently accrues from establishing common definitions and rules of alcohol and alcoholic beverages for excise purposes at EU level. When looking at the provisions related to denaturing alcohol and in particular PDA, the source of the current complications lays precisely in the absence of clear rules at EU level. Aligned to this, and because of that ambiguity, the MS are interpreting those current rules differently, and businesses therefore take advantage of the more flexible approaches used in certain MS. There is a lack of clear understanding of the rules on mutual recognition of denaturing methods between MS, which also causes administration problems for authorities and businesses alike. MS themselves highlighted the need for clear rules on the exemption of denatured alcohol. One MS noted for example that the “definition of rules at this [EU] level is of utmost necessity, otherwise each MS will have its own system, according to its national interests, and that will only complicate matters.” Another MS remarked that “a common system established at EU-level will help the functioning of the common market and facilitate equal treatment. However, any rules must be detailed and clear enough to ensure they are interpreted the same way in all MS.” The evidence from both Studies showed that clear rules, common for all MS would protect the single market. No bilateral or multilateral agreements could have the broad EU impact. Decisions taken unilaterally by MS, such as issued BTIs for certain alcoholic beverages, create additional complexity. A solution that would clarify the scope of the current categories in agreement of all MS would provide a much more effective solution. Although rulings of the CJEU established criteria to classify borderline products from genuine OFBs, the subjectivity of the criteria has magnified the classification uncertainties. The Ramboll evaluation remarked that although little quantifiable data was available for analysis, taking up effective measures to resolve difficulties in classifying alcoholic beverages for excise purposes would reduce administrative costs both for the Member States’ administrations and for the economic operators involved. It concluded there is significant added value from establishing common definitions of alcohol and alcoholic beverages for excise purposes at EU level. When it comes to the reduced rates for small breweries, used by many MS, the lack of clarity of the term 'independent brewer' and the cross-border implementation of the reduced rates is problematic. In the Ramboll evaluation twenty MS strongly agreed that setting the basic rules at EU level would support the application of an uniform approach and would avoid distortion of competition. Furthermore the fact that this relief does not apply to small producers of other products also distorts competition within and between MS. The reduced rates for low strength alcohol are irrelevant for most beverages as a result of other Union law. The threshold for beer does not encourage brewers developing low strength beers. BE and SE supported reduced rates for low strength alcohol in the Ramboll evaluation as they allow for the promotion of alternatives containing less alcohol. In their opinion this is better for consumers' health and is working towards a system of taxing products based solely on their alcoholic content. With regards the measurement of Plato degree of sweetened / flavoured beer, the source of the current complications lays precisely in the absence of clear rules for 'finished product' at EU level. Because of that ambiguity, the MS are interpreting those current rules differently. As with the subsidiarity test, it is not possible for MS to address the problems and problem drivers in isolation without a proposal to amend the structures Directive.

In conclusion, if the problems at hand are to be addressed in a coherent and meaningful fashion it can only be achieved through a legislative proposal supported by some non-legislative guidelines. Therefore, it is necessary for the Commission, which has responsibility for ensuring the smooth functioning of the internal market and promoting the general interest of the European Union, to propose action to improve the situation. The legal basis is Art. 113 of the Treaty on the Functioning of the European Union (TFEU). 4.What should be achieved? As explained in detail under the problem definition, given the broad scope of Directive 92/83/EEC covering a variety of products and provisions, the problem areas under this initiative are, for the main, very divergent from one another, requiring dedicated specific analysis. The complex structure of this report is illustrated in Figure 2. As a result, the objectives are also drawn up in such a way that they correspond only to specific problems/drivers. 4.1.General objectives The spirit of Directive 92/83/EEC and its general objective is the proper functioning of the internal market for alcohol and alcoholic beverages. In the context of this initiative, this objective is complemented by two other general objectives, which were identified applicable during the evaluation: safeguarding the revenues of the MS and contributing to protection of human health. The last two objectives, although not directly relevant to all problem areas, are particularly important for some of them, as shown in Figure 2. It was therefore important to have them included in the scope of the analysis and propose measure with the aim of achieving them. The general objectives behind the initiative are therefore as follows: ·ensuring the proper functioning of the internal market for alcohol and alcoholic beverages, free and undistorted movement of such goods within the EU (Art. 26 and 113 TFEU); ·safeguarding the revenue of MS; ·ensuring human health protection in Union policies and activities (Art. 168 TFEU). 4.2.Specific objectives The general objectives translate – albeit not one-to-one (see Figure 2), into the specific objectives, which can be defined as follows: ·ensuring fair treatment and similar economic conditions for businesses across all alcohol sectors, including small producers of all alcohol types; ·preventing and correcting any distortions of competition in the application of the exemption for different types of denatured alcohol, of the excise duty for sweetened beer, and of the reduced rates for low strength alcohol and small producers; ·providing clear rules on the scope, classification and calculation of excise duties for businesses and MS

·providing clear and efficient conditions to determine denaturation procedures for all types of denatured alcohol; ·reducing administrative burden and compliance costs for businesses and tax authorities, and providing legal certainty specifically in the area of classification and the exemption for denatured alcohol; ·strengthening the fight against fraud and tax evasion (including excise duty circumvention), through clear and consistent framework governing the calculation and collection of excise duties. 5.What are the various options to achieve the objectives? 5.1.Link between problems/drivers and options As detailed in section 2.1, the problems analysed in this report touch upon 4 distinctive areas: (i) exemptions for denatured alcohol, (ii) classification of certain alcoholic beverages, (iii) reduced rates for small producers and low strength alcoholic beverages, and (iv) measurement of Plato degree of sweetened/flavoured beer. These distinct problems, and their underlying drivers, need to be addressed in different ways, which influences the chosen aggregation of impacts into individual sets of measures targeting specific issues to be bundled together at the end of the analysis into packages. To illustrate this better, improving the provisions of Directive 92/83/EEC may be the solution to resolve some of the problems; for others, the solution may be found in legislation that is outside the scope of the present initiative. There are also specific areas where no alternatives other than acting/no-acting could have been identified. The report considers all possible policy options but focuses its analysis on the ones, which have been retained for the policy-makers. The reasons for discarding some options early on as well as considerations and constraints behind others are presented under each cluster. For better illustration of the problems, their drivers, objectives and corresponding options are presented in Figure 2 below. The baseline scenarios have not been included in this figure although they are systematically described under each policy cluster and constitute the framework against which all options will be assessed. Figure 2 – Overview of the intervention logic 5.2.Dysfunctions in the application of exemptions for denatured alcohol When looking to resolve the issues with denatured alcohol, there is a need to balance between harmonising the understanding of the provisions to reduce the effects of the differing interpretation, maintaining flexibility for producers and users of denatured alcohol to have denaturants that match their products, and ensuring that customs authorities can implement sufficient control to limit the risk for abuse of the exemptions. Ideally full harmonisation of CDA formulations would be the obvious policy option to resolve the legal uncertainties that persist around the mutual recognition of CDA. This would entail: ·Agreement on a single formulation, containing the same denaturants in the same concentration for CDA across the entire EU; ·Elimination of all remaining national formulations; ·Potentially a significant change in the wording of Article 27(1)(a) and 3 and 4, to reflect a new procedure for defining the common formulation, which would supersede the current process of notification by the MS. There is strong opposition from a limited number of MS to the full harmonisation of CDA formulations. Even those in favour of full harmonisation may wish to retain control over possible future changes and therefore would not agree to a change to the notification process of Articles 27(3) and (4). Furthermore, findings of the Ramboll evaluation do not suggest that there should only be one denaturing method, neither to prevent fraud, nor to ensure fair competition between economic operators. Therefore this option will not be assessed further in this impact assessment due to the fact it is unlikely to be feasible at this time. 5.2.1.Option 0 – baseline scenario

The adoption of Regulation 2017/2236 on the mutual recognition of procedures for the complete denaturing of alcohol for the purposes of exemption from excise duty will greatly reduce problems arising from the unclear rules on recognition of CDA formulations. The possibilities for fraudsters to use the 'weakest' formulation will be reduced by the replacement of national formulation by the Eurodenaturant and thereby reducing the risk of fraud with CDA overall. However, the problems will not be fully eliminated and MS could re-introduce national CDA formulations, if they wish to. The proliferation of national approaches to PDA will continue and possibly intensify for biofuels, which accounts for the largest proportion of PDA. Divergent interpretations in the area of PDA are likely to remain despite the exploratory work carried out by the Fiscalis Project Group and the uncertainty for cross-border trade will continue. 5.2.2.Option 1 –clarify mutual recognition of CDA This option would clarify the rules in the Directive for mutual recognition of CDA in order to eliminate divergent interpretations. The identified possible approaches to clarify mutual recognition are the following: 'Hybrid' mutual recognition (option 1.a): Each MS would have to recognise CDA produced in another MS using the f