EN Official Journal of the European Union C 69/10

Opinion of the European Economic and Social Committee on the ‘Report from the Commission to the Council, the European Parliament and the European Economic and Social Committee on the rates of excise duty applied on alcohol and alcoholic beverages (presented pursuant to Article 8 of Council Directive 92/84/EEC on the approximation of excise duty on alcohol and alcoholic beverages)’

(COM(2004) 223 final)

(2006/C 69/03)

On 27 May 2004, the European Commission decided to consult the European Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the abovementioned report.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 8 November 2005. The rapporteur was Mr Wilkinson.

At its 423rd plenary session of 18 and 19 January 2006 (meeting of 18 January 2006), the European Economic and Social Committee adopted the following opinion by 81 votes to 33 with 15 abstentions.

1. Summary of Conclusion and Recommendations

1.1 The current system of taxation on alcohol and alcoholic beverages is not working in accordance with what consumers have a right to expect from the internal market but the Member States (MS) have not agreed to harmonise the excise rates applied to these products beyond the current agreement on minimum rates. Excise is the term used by trade experts to denote the tax payable in the country of consumption.

1.2 The frequency of reports on the current system by the Commission should be made more realistic by requiring them no more frequently than every 5 years.

1.3 The current system regularly raises problems over the place of certain products in the currently agreed structures to which there is no simple answer; this can lead to each MS finding its own solution. Problems also persist over the correct coding in the Common Nomenclature. There are two major categories of trade in these products to be taken into consideration: trade between professionals and purchasing by private individuals, which can take the form of either direct or mail-order purchases, each of which raises separate issues.

1.4 Problems from the point of view of health are the result of the abuse of alcohol by individuals, not the form in which the alcohol is consumed.

1.5 Higher excise duties do not tackle the alcohol abuse problems that exist with individuals. There is no conclusive evidence that high rates of excise duty reduce the problems of abuse over the longer term. Consequently, other measures based essentially on education and prevention, must be employed in order to tackle these problems and improve public health.

1.6 It is recommended that the Commission considers dividing alcoholic beverages into two basic categories, with the implementation of a standard basis for all alcoholic beverages included in these two categories as described at paragraphs 7.3 to 7.10 below, where all alcoholic drinks are taxed according to their their type, taking into account their means of production, effects on health and alcohol content. A separate approach should however be adopted for wine and other fermented drinks (beer, cider and perry).

1.7 It is recognised that such a change could not be implemented quickly and would have to be introduced over a considerable period of time.

2. Supporting arguments

2.1 The Commission has presented a report (1) on the operation of the EU wide system of minimum rates of taxation for alcohol and alcoholic beverages. It considers the way in which the current system works with respect to the functioning of the Internal Market. It concludes that more convergence between the rates of excise applied in the Member States could reduce fraud and distortions to competition.

2.2 However, it notes that Member States have widely different views on appropriate levels for the minimum rates (2) and, given that this is a subject that requires unanimity for change, wishes to launch a wide debate on the subject considering all appropriate aspects of the matter. The provisions of the structures directive (3) are also in need of further consideration and are included in this debate. This is the Committee's contribution.

3. General comments

3.1 The Commission's report provides a most useful analysis of the situation and gives many facts to show that change is needed if the Internal Market is to be more effective for the benefit of European consumers, clearer for those who are involved in the alcoholic drinks industry, less distorting to competition and instrumental in reducing the current problems over fraud and smuggling.

3.2 It also gives data showing how important the revenues that MS derive from excise duties on alcoholic drinks are (4) and the extent to which they diverge (5).

3.3 Each MS has its own tax policies and they currently show no sign of wanting to harmonise them. This accounts for the failure of the Commission, despite its efforts, to report on the implementation of the current system at the intervals required in the original directive. The frequency of reporting should be made more realistic, possibly setting it at once every 5 years.

3.4 When MS set such policies they take into account past experience, public health, relevant research and the different cultures and lifestyles of their populations. The taxation area is one where changes can only be made by unanimity and so any significant changes that may be agreed would have to take effect over time.

3.5 It is worth recalling that the excise taxes (6) in question are on beverages containing alcohol, but are applied at different rates depending on the category of alcohol concerned.

4. Internal Market

4.1 Tax induced distortions of competition (7) and diversions of trade are not in accord with the principles of the internal market looked at in isolation; both are still features of the alcoholic beverages market in the EU.

4.2 On the other hand, the internal market does allow the consumer to benefit from the possibility of making cross border purchases of alcohol. This Committee supported the recent proposal to increase and rationalise these benefits by allowing, in particular, distance purchasing of alcohol, which is positive from the point of view of free movement of goods.

4.3 However, most MS are having to accept the need to use more resources to fight the smuggling and fraud that have resulted primarily from the different excise (and VAT) rates applied. This criminal activity is a serious problem for the EU, most often directly affecting those MS that have chosen to tax alcohol the most highly.

4.4 The effect of enlargement (if any in this area) is not yet clear. Since the same directives apply, and since several ‘enlargement’ MS have had to increase the excise rates that they applied before accession, there should not be very different results in these countries.

5. Minimum rates

5.1 The only step that MS would agree to take towards approximation in 1992 was to set ‘minimum rates’ for each category of alcoholic drinks. These rates were set at the following rates: — Spirits: EUR 550 per hectolitre of pure alcohol (EUR 5,5 per lpa (8)) — Beer: EUR 1,87 per hectolitre/degree of alcohol (EUR 1,87 per lpa) — Intermediate products: EUR 45 per hectolitre of product (EUR 2,5 per lpa) — Wine (still or sparkling): zero (zero)

5.2 Any MS may set an excise rate above the agreed minimum rate at any time. Thus failure to raise the existing minimum rates is not crucial from the point of view of raising revenue. Some MS have been forced to raise excise duty on alcohol whilst others have lowered it (9), providing closer approximation and reducing the incentive for cross border purchases (legal) and fraud and alcohol smuggling in the single market (illegal). The proposal merely brings the excise rates closer to the minimum rates rather than achieving genuine harmonisation, as each Member State will continue to set its own base rate.

6. Wider objectives of the Treaty — health

6.1 Five MS (10) at present acknowledge that they take public health into account in setting their tax policies. But a recent Economic and Financial Affairs Council considering the subject of this opinion (11) noted that the great majority of MS do not consider that health and social questions should play a major role in fixing of excise tax rates (12).

6.2 Alcohol is a part of a normal lifestyle for the majority of EU adult consumers. Of these the great majority are responsible in their alcohol consumption habits. A certain amount of alcohol consumption can bring health benefits for some groups. However, the problems from excessive consumption of alcohol can be, and often are, serious. The problems affect their own health, but also cause serious social problems and can have adverse economic effects. Of particular concern is the abuse by some younger consumers (13). There is also a need for more education in the dietary aspects of alcohol (14). It is abuse that needs to be tackled, rather than moderate consumption, and, in general, the need for comprehensive education in nutrition.

6.3 The question in this context is whether higher tax rates (and hence higher prices, since the tax component of many alcoholic drinks exceeds the product price) can provide a solution to abuse.

6.4 The evidence on which any answer to this question can be based is not clear. Price rises can have an effect on overall consumption but there is no reliable evidence that any such reduction in consumption includes those who abuse alcohol. There is evidence that where a particular form of alcoholic beverage is taxed exceptionally highly relative to other products its consumption is reduced as the consumer turns to other (less highly taxed and therefore cheaper) products. We conclude that high prices are not of themselves a solution to alcohol abuse.

6.5 Conversely it is not easy to establish whether the sudden impact of significant reduction in taxation is likely to have an unwelcome effect on consumption in other than the short term; the indications are that significant reductions should be phased in over time.

6.6 Abuse is best tackled by education, information and training programmes primarily aimed at those who do abuse alcohol. The Commission should take this into account in proposing their public health policies (15).

7. Possible way forward

7.1 Faced with the realities of the current situation we conclude that the present system, which has evolved over time, is unsatisfactory in the context of the single market. While the internal market is working very well in many areas, in the alcoholic drinks area diversions of trade and tax induced distortions of competition persist. Further, despite increasing efforts by MS illegality, in the form of fraud and smuggling, shows no sign of being brought to significantly lower levels.

7.2 The Committee agrees that greater convergence would contribute to reducing fraud and distortions to competition. Further, while they have agreed to increase the existing minimum rates in line with inflation they have not been able to agree on the other problem areas (see footnote 3 above). However, there is no good reason why the Commission should not propose to MS changes in the existing structures and excise system.

7.3 Recognising the current considerable variations within the EU of both direct and indirect taxation, it is unrealistic to expect the sudden introduction of a radical new system; but it is time to suggest a new system that could be introduced gradually over a long period of time.

7.4 The necessary start point is to recognise that the product should be taxed according to its classification as a fermented or distilled beverage. Fermented drinks are natural beverages, produced agriculturally and for consumption, made exclusively by fermenting grapes, grains, fleshy fruits or berries. Distilled drinks or spirits refer to all those beverages which have been distilled, or those which have been mixed with other distilled drinks or other liquids, or any alcoholic drinks whose production is not subject to specific regulations.

7.5 In particular the consequences on the CMO (16) for wine would need very careful consideration; the EU wine industry is already facing substantial challenges (such as falling consumption in many MS and greater market penetration by imported wine). Other categories of alcoholic drinks have similar difficulties.

7.5.1 Further to the previous point, it should be pointed out that wine represents a significant supplementary activity for farmers. Many winegrowers produce wine for their own family consumption, independently of their production for cooperatives or wholesalers, selling any surplus to a small number of private local individuals. Article 10 of Council Directive 92/83/EEC already allows MS to exempt from excise duty wine produced by a private individual for personal consumption (by self, family or guests, but not where a sale is involved) (17). Similarly in article 29 of Council Directive 92/12/EEC MS are permitted to exempt small wine producers (18) from the requirements relating to movements and monitoring of their products. If MS do not allow these permitted exemptions they could represent an additional economic burden for a wine-producing sector which is already affected by competition from newly-emerging third countries. Wine would then have a fair case to be excluded from the ensuing rationale.

7.6 We therefore recommend that a minimum rate should be set by the Commission for all alcoholic beverages in each category; i.e. a minimum rate for fermented beverages and a minimum rate for distilled beverages. In addition, we propose taxing the alcohol content of each particular beverage within each category; for example, the same quantity of product would pay four times as much at 40 %abv (19) compared with the same quantity of product at 10 %abv.

7.7 Fermented beverages have one particular problem that other categories of alcoholic drink do not have. The alcohol content of any fermented beverage can (and does) change according to various factors that affect the raw material and means of production. It will therefore be necessary to establish a somewhat more flexible approach to fermented beverages, by placing them in bands according to their strength, to avoid unduly complicating the work of producers and traders.

7.8 Such a system would enable Member States to retain the possibility of setting a zero rate for wine or other fermented beverages, and to extend this option to the entire fermented beverage category.

7.9 This would result in a genuine simplification of alcohol taxation, though it would not decrease the scope for fraud while MS continue to set widely different rates for alcohol taxation.

7.10 Under this system there would be no need to try to fit the increasing number of new products into a structure not suited to them; they would simply be charged based entirely on their alcohol content (abv).

7.11 Further, the excise system would be more robust and have no significant distortions and Common Nomenclature (CN) problems would be resolved.

7.12 Alcohol and health, as stated above, is a matter of concern; but under such a system of all alcohol being taxed on a standard basis, the tax burden would be heaviest on those who consumed the most alcoholic beverages depending on whether these are exclusively fermented or distilled. This would help understanding that concerning health what matters primarily are drinking patterns, bearing in mind the benefits of moderate consumption as compared to the dangers of abusive consumption.

Brussels, 18 January 2006. The President of the European Economic and Social Committee Anne-Marie SIGMUND

(1) Report from the Commission to the Council, the European Parliament and the European Economic and Social Committee on the rates of excise duty applied on alcohol and alcoholic beverages (presented pursuant to Article 8 of Council Directive 92/84/EEC on the approximation of excise duty on alcohol and alcoholic beverages) COM(2004) 223 final.

(2) Council Directive 92/84/EEC on the approximation of excise duty on alcohol and alcoholic beverages: OJ L 316, 31.10.1992.

(3) Council Directive 92/83/EEC on the harmonisation of the structures of excise duties on alcohol and alcoholic beverages: OJ L 316, 31.10.1992. Subjects requiring consideration include whether it should continue to be permissible to tax still and sparkling wines at different excise rates, the need to update the codes of the combined nomenclature and the classification of some similar products in different ways.

(4) The total value to EU 15 GDP in 2001 was over EUR 25 billion; in GDP percentage terms the highest was Finland (0,96 %) and the lowest was Italy (0,06 %).

(5) Excise duty rates applied to alcoholic beverages vary between highest and lowest taxing MS by 15,9 times for beer and ‘intermediate products’ and 9,2 times for spirit drinks. No such comparison is possible for wines (including sparkling wines) since wines are not taxed at all in 15 of the 25 MS and a minimal tax (of about 2 eurocents) is applied in 2 further MS.

(6) Excise is tax payable on such goods in the country of purchase.

(7) Wineand beer have been found to be to some extent substitutable by the ECJ: case C-170/78 and case C-166/98.

(8) lpa: ‘litre of pure alcohol’; thus based on alcohol content, taking beer, wine and intermediate products at typical retail strengths.

(9) In each of these cases this has primarily been the result of citizens in the MS concerned exercising their right to buy in other MS in the internal market.

(10) Denmark, Estonia, Finland, Ireland and Sweden.

(11) Conclusions of Session 2651 held on 12 April 2005.

(12) The same ECOFIN Council meeting asked the Commission to make proposals to raise the current minimum rates in line with inflation over the past years. This decision will force a significant number of MS to raise the rates that they apply to some alcoholic drinks. The Commission recognises that some MS will have difficulties in imposing the increases and may need derogations and/or transitional periods.

(13) European School Survey Project on Alcohol and on Drugs (ESPAD) 2003 report.

(14) ‘Obesity in Europe – role and responsibilities of civil society partners’ (own-initiative opinion) (OJ C 24, 31.1.2006).

(15) DG SANCO is working on an alcohol strategy proposal. It is unlikely that this study will be completed for a considerable time.

(16) CMO: Common Market Organisation.

(17) Similar exemptions may be applied for beer (Article 6) and other fermented beverages (Article 14) of this directive.

(18) Small wine producers' is here taken as persons producing an average of less than 100 000 litres of wine per year on average.

(19) ‘abv’ means alcohol by volume and denotes the percentage of the product in question that is alcohol.