Notice of initiation of an examination procedure concerning obstacles to trade within the meaning of Council Regulation (EC) No 3286/94, consisting of measures imposed and practices followed by the Eastern Republic of Uruguay affecting trade in Scotch whisky
Date: 2004-10-23
Institutions: European Commission
Subjects: Uruguay, common commercial policy, spirits, trade restriction

23.10.2004

EN

Official Journal of the European Union

C 261/3

Notice of initiation of an examination procedure concerning obstacles to trade within the meaning
of Council Regulation (EC) No 3286/94, consisting of measures imposed and practices followed by
the Eastern Republic of Uruguay affecting trade in Scotch whisky

(2004/C 261/03)

On 2 September 2004, the Commission received a complaint
pursuant
to Article 4 of Council Regulation (EC) No
3286/94 (1) (hereinafter ‘the Regulation’).

1. THE COMPLAINANT

The complaint was lodged by the Scotch Whisky Association
(SWA) on behalf of the its 54 member companies, all of whom
are distillers, blenders, brand owners, brokers and exporters of
Scotch whisky, comprising together over 95 % of Scotland's
distilling and blending capacity.

The SWA is an association acting on behalf of one or more
Community enterprises within the meaning of Articles 4(1) and
2(6) of the Regulation.

2. THE PRODUCT

The complaint concerns Scotch whiskies produced from cereals
in Scotland, in accordance with the provisions of Council Regu-
lation (EC) No 1576/89, and classified within Chapter 22 of
the harmonised Customs Nomenclature under HS subheading
2208 30.

However, the examination which the Commission is initiating
may also cover other products, particularly those which inter-
ested parties making themselves known within the time limits
mentioned below (see Section 8), can show are affected by the
alleged practices.

3. SUBJECT

The complaint concerns four separate aspects of Uruguay's tax
arrangements concerning imported whiskies:

The price bands for whisky are set at levels designed to ensure
that all domestic brands benefit from the lowest taxation. At
the same time, Uruguay excludes from the lowest price band
all whiskies aged more than three years. Since EU regulations
three years,
require that whisky be matured for at
Uruguay's ageing requirement has the effect of excluding EU
whiskies from the lowest tax category.

least

2. Prepayment of tax

According to the complaint, Uruguay requires that importers
pre-pay the taxes on imports at a rate of 80 % of the customs
value of the goods. A similar requirement does not apply to
domestic producers. Although the pre-payment is offset against
the final
it nevertheless impacts adversely on
importers' cash flow and renders imported spirits less competi-
tive vis-à-vis their domestic counterparts.

tax liability,

3. Application of strip stamps

The complainant contends that there is also discrimination
against imported products by virtue of the requirement for
strip stamps to be affixed to them on arrival
in the market,
whereas strip stamps are not imposed on domestic products.

4. Lack of transparency

Finally, the complaint addresses the alleged lack of transparency
and predictability of the IMESI system, due to the frequent
changes in the price band thresholds and the fictional prices,
and to the absence of any methodology or criteria to set those
values.

1. Ageing requirement for whisky

4. ALLEGATIONS OF OBSTACLES TO TRADE

According to the complaint, Uruguay's excise taxes on spirits
(IMESI) are based on a system of price bands and fictional
prices in order to determine the taxable base for each spirit
drink. A flat tax rate is then applied in order to establish the
final tax liability.

(1) Council Regulation (EC) No 3286/94 of 22 December 1994 laying
down Community procedures in the field of the common commer-
cial policy in order to ensure the exercise of the Community's rights
under international trade rules, in particular those established under
the auspices of the World Trade Organisation (WTO) (OJ L 349,
31.12.1994, p. 71). Regulation as last amended by Regulation (EC)
No 356/95 (OJ L 41, 23.2.1995, p. 3).

The SWA considers that the practices described in Section 3
constitute obstacles to trade within the meaning of Article 2(1)
of the Regulation.

(a) Ageing requirement for whisky

The SWA contends that Uruguay's ageing requirement accords
treatment
is clearly less
favourable than that accorded to ‘like’ products of national
origin, in breach of GATT, Articles III.2 and III.4.

to imported Scotch whiskies that

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Official Journal of the European Union

23.10.2004

According to the SWA, the three-year ageing requirement has
the effect of excluding from the lowest price band imported
whiskies that would otherwise be included in such lowest band.
Only imported whiskies are affected by such requirement, as
Uruguay's standards for spirits require only two years of ageing
for whisky. Moreover, the SWA claims that price bands for
whisky are set at levels designed to ensure that all domestic
brands benefit from the lowest taxation.

little over 40 % (at the end of 2002) to just under 35 % as
traded down to lower-priced and lower-taxed
consumers
domestic products
in a context of economic difficulties.
According to the complainant, with price a significant factor in
consumers' purchasing decisions,
the discrimination against
Scotch whiskies in the ‘value for money’ segment has had a
particularly negative effect.

(b) Pre-payment of tax

The SWA claims that,
in so far as Uruguay's pre-payment
requirements for imported spirits constitute a restriction on the
importation of spirit drinks from other WTO Members, they
are in contravention of GATT, Article XI.1. Moreover, by
applying internal
taxation to imported products so as to
provide protection for domestic production, the measures at
issue are in breach of GATT Article III.2.

(c) Strip stamps

their

enhancing

competitiveness

The complainant has submitted estimates of the likely effect on
the shelf prices of a selection of lower-cost Scotch whiskies if
the current ageing requirement were to be eliminated. The shelf
prices of a number of popular brands would fall by some 15 %,
thereby
vis-à-vis many
domestic brands. Moreover, there are several other brands of
Scotch whisky which could also benefit from inclusion in the
lowest price band. At present, there is no incentive to trim
margins because all Scotch whiskies are automatically excluded
from the lowest price band irrespective of their price at the
point of first sale. Moreover, the alleged discriminatory applica-
tion of the pre-payment and the strip stamps requirements also
affects the retail price of imported whiskies, thereby adversely
affecting their competitive position in the market place.

The SWA contends that Uruguay's strip stamp arrangements
for imported spirits constitute a restriction on the importation
of goods in contravention of GATT Article XI.1. In the alterna-
tive, the measures are in breach of GATT Article III.4 in so far
as they accord to imported spirits treatment that is clearly less
favourable than that accorded to ‘like’ products of national
origin.

Finally, the complainant refers more generally to the market
performance of imported spirits in Uruguay, where also the
other types of
internationally traded spirit drinks, such as
brandy, gin, rum and vodka, have made little impact in the
market, especially if compared with the market penetration
achieved in neighbouring markets.

(d) Lack of transparency

The SWA claims that Uruguay's IMESI tax arrangements are in
breach of GATT Article X.3(a) in so far as they are not adminis-
tered in a uniform, impartial and reasonable manner, due to an
alleged lack of transparency and predictability.

the factual

information available and the
In the light of
evidence submitted,
the
the Commission is
complaint contains sufficient prima facie evidence of the exis-
tence of obstacles to trade within the meaning of Article 2(1)
of the Regulation.

satisfied that

5. ALLEGATION OF ADVERSE TRADE EFFECTS

In 2002 SWA members exported Scotch whisky with a value
of some EUR 20 million to Uruguay, making it the industry's
fourth most important market in Latin America. Within the
imported whiskies category, Scotch whisky represents some
90 % of the total sales of imported whisky in Uruguay.

to the
The complainant claims that
complaint have contributed to a considerable fall in consump-
tion of Scotch whisky in Uruguay. By the end of 2003, Scotch
whisky's share of the overall whisky market had fallen from a

the practices subject

The Commission considers that the complaint contains suffi-
cient prima facie evidence of adverse trade effects, within the
meaning of Article 2(4) of the TBR.

6. COMMUNITY INTEREST

The Scotch whisky industry exports each year goods valued in
excess of EUR 3,5 billion to some 200 world markets. Over
10 000 people are directly employed in the production of
Scotch whisky, while a further 50 000 jobs across the United
Kingdom are dependent in part on the industry.

The Commission considers it essential to ensure a level playing
field in third-country markets for our export industries, particu-
larly with regard to internal taxes. Tariff protection should not
be replaced with other protectionist barriers in breach of inter-
national commitments. This is especially important in the case
of alcoholic beverages, as they typically bear a high tax burden
through the combination of excise duties and value added
taxes.

In view of the above, it is considered to be in the Community's
interest to initiate an examination procedure

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Official Journal of the European Union

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7. PROCEDURE

Having decided, after due consultation of
the Advisory
Committee established by the Regulation, that there is sufficient
evidence to justify initiating an examination procedure for the
purpose of considering the legal and factual
issues involved,
and that this is in the interest of the Community, the Commis-
sion has commenced an examination in accordance with
Article 8 of the Regulation.

Interested parties may make themselves known and make
known their views in writing on specific issues raised by the
complaint, providing supporting evidence.

Furthermore, the Commission will hear the parties who so
request
in writing when they make themselves known,
provided that they are primarily concerned by the result of the
procedure.

This notice is published in accordance with Article 8(1)(a) of
the Regulation.

8. TIME LIMIT

Any information relating to the matter and any request for a
hearing should reach the Commission not later than 30 days
following the date of publication of this notice and should be
sent in writing to:

European Commission
Directorate-General for Trade
Mr Ignacio Garcia Bercero, DG Trade F.2
CHAR 9/74
B-1049 Brussels
Fax (32-2) 299 32 64