Case Study Report Classification
Evaluation of Council Directive 92/83/EEC
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Case Study Report - Classification
1.
Introduction
Directive 92/83/EEC defines, for excise duty purposes, five categories of alcoholic
beverages:
 Beer - Art. 2
 Wine (still and sparkling) – Art. 8
 Fermented beverages other than beer and wine (still and sparkling) – Art. 12
 Intermediate products – Art. 17
 Ethyl Alcohol – Art. 20
By establishing different categories of products, the Directive therefore acknowledges
the clear and explicit intention of the legislator to create the possibility for Member
States to apply differentiated excise duties on the abovementioned categories
when pursuing national policies for alcohol taxation.
While some Member States, through the setting of their own national excise rates, have
moved closer to a policy of equivalence of taxation of alcoholic beverages, most
Member States apply a taxation policy which sets different excise rates for the
various groups of alcoholic beverages that the Directive establishes. We understand this
approach to alcohol tax policy to be one which pursues multiple objectives.
While ensuring that, as a general rule , all alcoholic beverages are subject to
excise duty, as currently observed, the taxation policies of Member States tend to
offer a preferential tax regime to certain products in order to preserve sociocultural aspects (e.g. the continuous production and consumption of traditional
products often made from natural ingredients grown in a particular location) and/or
support the generation or preservation of jobs, practices and traditional crafts. The
current excise policies of Member States tax potable ethyl alcohol more heavily
than other alcoholic beverages.
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The existence of a tax incentive to have ones products fall into one tax category over
the other may lead to situations where stakeholders (Member States authorities, as
well as economic operators) disagree over whether a particular classification, for excise
purposes, is in line with the intention of excise duty legislation. Irrespectively, a
coherent understanding and application of these categories across the EU is an
essential single market objective.
2.
Context and purpose of the case study
Directive 92/83/EEC is more than 24 years old. Legal, technological, production and
market developments since its adoption may have created new needs for classification.
As a result, this evaluation has paid particular attention to the appropriateness of the
definitions, for excise purposes, of alcoholic beverages.
The consultation of stakeholders in the context of this evaluation (consisting of
questionnaires to Member States, economic operators, and the general public) revealed
that classification is an important problem: 18 Member States and 23% of
economic operators reported difficulties in assigning products to the categories in the
Directive while 43% of the respondents to the public consultation reported that they
had seen or purchased alcoholic products which were packaged to look like their
equivalent higher strength sprits but were lower priced.
2
Exemptions are in place for Beer, Wine and Other Fermented Beverages for own consumption (Articles 6, 10
and 14)
2
BE, BG, DE, DK, EE, FI, FR, HR, HU, IE, IT, LU, MT, NL, PL, PT, RO and UK responded “yes” when asked
whether they encountered difficulties with assigning products to the categories of the Directive (such as
“uncertainty within your administration, disputes with economic operators”
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As a result of the significant issues raised by a majority of Member States and other
stakeholders regarding difficulties in classifying alcoholic beverages into the excise
categories defined by the Directive, the European Commission has asked Ramboll
Management to collect additional, in-depth evidence of the reported problems, their
source, impact (in terms of potential excise duty loss and increased administrative
costs) and potential solutions.
This case study has investigated difficulties in assigning products to the
categories of the Directive. This report takes no position on what would or would
not be the correct classification for customs of excise purposes of products referred to
in this case study.
The purpose of the case study was to collect additional, detailed information on the
reported cases of products “difficult to classify” and their root causes, investigate the
scale of the problem and identify solutions (legislative or otherwise) to the reported
issues.
For the purpose of this case study, we define products as “difficult to classify” to be
products:
 Which may fall under several excise categories or several CN codes, depending
on the interpretation of applicable provisions; or
 Which are classified differently in different Member States; or
 Whose classification has been the subject of dispute between Member State
authorities and economic operators (or between economic operators
themselves)
On the basis of in-depth interviews with Member States, economic operators and desk
research, examples of products which are “difficult to classify”, their characteristics,
actual and alternative classification as well as other elements researched have
supported an analysis of the root legislative causes (i.e. the legislative element being
subject to interpretation) across different products and across different Member States.
In addition to the potential tax impacts, other consequences resulting from these
examples (etc. increase of administrative costs, legal clarity, competitive aspects, etc.)
have also been assessed.
This present report presents the results of our case study analysis together with our
conclusions and possible solutions to classification issues.
3.
Main findings and conclusions
In the vast majority of cases (both in terms of absolute number of products as well
as in terms of volumes), the classification of alcoholic beverages and the assignment of
products within the given excise categories is straightforward and causes no
difficulties for Member States and mainstream (i.e. most consumed) alcoholic
beverages.
However, the existence of tax incentives having ones 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 Member States tax administrations and
some competitors) circumventing the intention of the legislator of what should fall
within the more favourable category.
3
See decision of England and Wales High Court, in case Diageo North America, Inc & Anor v Intercontinental
Brands; etc.
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As has been documented in previous reports, as well as in our current research,
disputes related to the “correct” classification of certain alcoholic beverages show that
the intention of the legislator is not being interpreted coherently across the EU
with potential consequences in terms of excise revenue, legal clarity and stability of
taxation as well as on fair competition for economic operators.
Although research indicates that the quantities of products “difficult” to classify remain
low, the sample of examples provided by stakeholders in the context of this study as
well as the large body of established case law indicates a systematic weakness of
the legislative environment with potentially damaging consequences for the
stakeholders involved.
Based on the findings, we consider it is the obligation of the legislator to clarify its
position on the basis of the policy objectives it wishes to pursue, unequivocally, as to
what products should fall in the different excise categories that have been created.
The evidence brought forward in this evaluation would suggest that the Commission
should take action in this area in order to ensure that the legislator clarifies it’s
position.
Concretely, the research conducted has identified products difficult to classify falling
within the following product groups:
 “Ready-to-drink” products (also known as “Alcopops)
 Medium strength fermented beverages between 10-15% ABV5
 Fermented alcohol pushed to 15-21% industrially, bottled and sold to look like
its equivalent, higher rate spirit
 Other, less prevalent issues (e.g. Wine to which flavours containing alcohol have
been added; Beer to which alcohol of distilled origin is added; Sparkling Wine)
4
Without going into the details about the “correct” legal interpretation of the customs
classification under code CN2206, (which is the subject of past and present case law), it
is clear from the analysis of the examples of products within this case study that the
wide majority of difficulties in classifying alcoholic beverages for excise purpose is due
to the link between the customs classification and the definition of the excise
categories. Specifically, as Article 20 is currently defined, a classification for customs
purposes, as CN 2206, of a product below 22%, would automatically exclude it from it
being taxed as “ethyl alcohol”. This would result in an excise classification of either
W200 (“Other Fermented Beverages”) or I000 (“Intermediate Beverages”) with
immediate impacts on the excise rate applicable and potentially distortive effects on
competition.
There are multiple solutions which could be implemented to minimise the number of
instances of difficulties in classification for excise purposes. While some measures can
be taken by Member States, within the current legislative context, others require a
revision of Directive 92/83/EC. Among these, we recall:
 Member States could unilaterally revise tax rates and structure of tax under
“other fermented beverages”
 Member States could apply more strictly the notion of “entirely of fermented
origin”
 Member States could unilaterally impose an additional excise tax on ready-todrink (alco-pops)
 The EU Commission, together with Member States could support the move to
add an additional CN note (at 8 or 6 digit level) so as to provide clarity as to the
4
5
Products difficult to classify represent a sub-set (i.e. not all) of this category
Ibid.
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


correct treatment, for customs purposes of fermented products which lost their
essential character.
The Directive can be amended to include another category of excise products
that would adequately capture fermented products which lost their essential
character.
Article 20, indent 1 of the Directive can be amended to allow the inclusion of
products falling under CN 2206 within its scope, specifically those fermented
products which lost their essential character
The Directive can be amended so as to reflect, correctly and uniformly, the
criteria expressed by ECJ cases dealing with products difficult to classify.
In addition to the above measures reflecting the difficulties in dealing with innovative
products using alcoholic beverages with a fermented base, we have also identified
several inconsistencies in the formulation / implementation of the Directive. Although
minor, steps could be taken to: more accurately define the consequence of adding
flavours containing alcohol to wine and to align the definition of sparkling wine for
excise and customs purposes.
The measures outlined above present both positive outcomes towards resolving
some of the difficulties encountered, however they may also be characterised by
uncertainties, weakness or possible unintended consequences on the
functioning of the market (some of these are explicitly mentioned within this report).
Any step forward should be based on a careful impact assessment into the potential
measures.
In as far as identifying what possible solution (or mix of solutions) is the most
adequate, our research indicates at least three dimensions which should be taken into
account in any potential impact assessment:
(i)
Legal clarity – The extent to which the solutions allow for an unequivocal
classification of the products (or types of products) found to be difficult to
classify
(ii)
Harmonisation – The extent to which the solutions are in line with the
principles of the internal market, allowing the free circulation of goods within
the EU
(iii)
Impact on competition – The extent to which fair competition between
products is maintained. This latter category takes into account two aspects:
the competition within each excise category as well as the competition
between products falling under different categories.
4.
Examples of products difficult to classify
In this section, on the basis of our research into reported cases of products difficult to
classify, we present the main groups (types) of products which cause the most
difficulties. As relevant, we discuss the outcomes and root causes separately, for each
group.
By far, the highest number of examples and the ones reported to have the most
damaging consequences refer to products which are at the “border” between CN
classification 2206 and 2208, meaning that from an excise perspective, they could fall
in either” “Other fermented beverages”; “Intermediate products” or “Ethyl Alcohol”
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4.1
Ready-to-drink products – low strength fermented beverages or mixtures (Alco-pops)
One of the most common products reported as being difficult to classify falls under the
category of ready-to-drink products (also known as alcopops). This study has collected
examples of such reported issues in at least 8 Member States 6
In this category, products reported to be “difficult to classify” are normally between 4%
and 7% ABV and consist of a fermented base with water, sugar, fruit juices, aromas
and colorants.
The amount and proportion of alcohol coming from different origins (i.e. fermentation v
distilled) is not material to define this category of products as difficult to classify
because the examples consist of products with various shares of fermented to distilled
alcohol.
Most examples provided were reported to contain alcohol of both fermented as well as
distilled origin, although this was not a necessity. At least one example was reported to
be based solely on alcohol of fermented origin which has been cleaned-up, in such a
way as to lose its characteristics of a fermented alcohol
Common to these products is that in the opinion of those reporting the examples the
products had lost the taste, smell and appearance of a beverage produced from a
particular fruit or natural product and that it had the appearance and characteristics of
a spirit drink, being labelled to that effect.
4.1.1 Classification
While in some Member States, they are considered to be (and taxed as) “Other
Fermented Beverages” - (W200), sometimes even against the wishes and opinions of
the respective tax administrations, in other Member States they are taxed as “Ethyl
Alcohol” / “Spirituous Beverages” - (S200).
The excise classification described above follows the customs classification in the sense
that products described above would be considered to be and taxed as “Other
fermented beverages” in countries where they are classified for customs purposes as
falling within CN 2206 and taxed as “spirits” in those countries where, for customs
purposes they fall under CN 2208.
4.1.2 Consequences
In all reported cases within this group of products, there is a clear difference between
the excise taxes applicable when these particular products are classified as W200 as
opposed to being classified as S200.
Specifically, depending on the individual variables of each case (i.e. the actual alcohol
content of the product and the country of taxation), the difference in excise tax (VAT
excluded) ranges from 7.48 EUR / HL to 89.7 EUR/HL of finished product.
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In addition to the quantifiable difference in terms of applicable excise duty, economic
operators interviewed 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
Member States).
6
7
8
BE; DE; EE; FI; IE; PT; NL and UK
A ready to drink beverage of 5.5% alcohol in Estonia
A ready to drink beverage of 5.5% alcohol in Belgium
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Finally, another negative consequence outlined by economic operators concerns
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 (Ready-To-Drink products) which
are based entirely on alcohol of distilled origin (which compete on the same
market) at a severe competitive disadvantage (see point above on difference in
taxation)
 Secondly, it undermines the excise category itself (i.e. “Other Fermented
Beverages”) by allowing RTDs to benefit from taxation at the same level as
fermented beverages produced using traditional methods and natural fruits
whose protection the category itself was supposed to benefit.
Although not investigated within the scope of this study, the point of view of the
consumer may also reveal a negative consequence if the expectations of consumers
regarding these products are based on the assumption that they are based on spirits
which have been pre-mixed to form a drinkable cocktail (as is the case with other
categories of products difficult to classify10).
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4.1.3 Legislative source of the problem and potential solutions
Due to the complexity of the problem and the similarities with products in other
categories, this causes and solutions are treated separately in section 5.
4.2
Medium strength Fermented Beverages or mixtures (10-15%)
Another group of products commonly reported as being difficult to classify is comprised
of medium strength alcoholic beverages with a fermented base. Although similar in
nature to the issue of “alco-pops”, the products falling in this group deserve a specific
analysis because some legal considerations as well as potential outcomes surrounding
them are rather different.
Fewer examples of such products were reported to be difficult to classify, nevertheless
they have been indicated as problematic products by the authorities of six Member
States .
11
In this category, products reported to be “difficult to classify” are between 10% and
15% ABV, with most of the examples being around 14%-15%.
Products in this group are slightly more diverse than “alco-pops”. However, they are all
manufactured on a fermented base (either wine or other fruits), some of them being
enriched with distilled alcohol.
Similarly to the ones described above, most examples provided were reported to
contain alcohol of both fermented as well as distilled origin, although this was not a
necessity. Common to these products is that in the opinion of those reporting the
examples the products had lost the taste, smell and appearance of a beverage
produced from a particular fruit or natural product and that they had the appearance
and characteristics of a spirit drink, being labelled to that effect.
4.2.1 Classification
In the cases of these examples, there are actually three potentially applicable excise
classifications: In situations where CN code 2206 is applicable the choice from an excise
perspective would be between “Other Fermented Beverages” (W200) or “Intermediate
products” (I000), although, in practice W200 would apply most often. If the product
As investigating these aspects has fallen outside the scope of this study, this theory cannot be confirmed or
infirmed in the context of this evaluation
10
See examples of Mixtures of Fermented and Distilled alcohol at approx. 21% ABV
11
DE; FR; HR; NL; PT; UK
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would fall for customs purposes within CN 2208 and “Ethyl Alcohol” (S200) excise
classification would apply.
4.2.2 Consequences
One of the reasons for grouping these examples as a different category than alco-pops
was to showcase the difference in excise tax applicable to these products depending on
interpretation of the provisions.
In all reported cases within this group of products, there is a large difference between
the excise taxes applicable when these particular products are classified as W200 as
opposed to being classified as I000 or S200.
Depending on the actual alcohol content of the product and the Member State where it
is being sold, the difference in excise tax (VAT excluded) ranges from 79.55 Euros /
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.
In addition to differences in terms of applicable excise duty, an important outcome
reported in relation to these examples are litigation costs. Given the monetary impact
at stake, disputes between tax administrations and operators in this area are more
likely to be taken to court resulting in significant costs for both the administration as
well as for the economic operators.
Although other negative consequences were not specifically mentioned by the
stakeholders which have reported these examples, an adverse impact on fair
competition could exist, should these types of products be in direct competitors (or be
marketed to be in direct competition) with higher taxed spirits (e.g. those falling under
I000 and S200).
4.2.3 Examples and Volumes concerned
One particularly illustrative example of products described above can be found in ECJ
case C-532/14 which concerns the excise tariff rate that is to be applied to alcoholic
beverages that are based on fermented alcohol, known as Ferm fruit, to which distilled
alcohol, sugar (syrup), milk, fats and various aromas are added. The alcohol
percentage is in total 13.4%. At least 51% of the alcohol consists of fermented alcohol.
The fermented alcohol is cleared by means of ultrafiltration and has therefore a neutral
taste, color and smell. The Tax Court considered the beverage as a liqueur, to be
classified under CN code 2208 7010, upon which the high excise rate of distilled alcohol
is due.
12
4.2.4 Legislative source of the problem and potential solutions
Due to the complexity of the problem and the similarities with products in other
categories, this causes and solutions are treated separately in section 5
4.3
High strength Fermented Beverages or mixtures (15-22%)
The highest number of products reported by stakeholders to be “difficult to classify” are
beverages based on fermented alcohol which has been subject to certain production
processes (e.g. ultra-filtration) or mixtures of alcohol below 21.9% to become
colourless and odourless. Most often, this alcohol base mixed with other flavours (or
without) is then marketed as a low-strength spirit.
Products sharing these characteristics have been reported in at least six Member
States as well as by numerous stakeholders in the context of this case study.
12
n.b. In the Netherlands
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The description of this kind of products, alongside the legal considerations and market
distortions they cause is well illustrated by existing case law .
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4.3.1 Classification
In situations where CN code 2206 is applicable from an excise perspective, these
products would be categorised as ”Intermediate products” (I000). If the product would
fall for customs purposes within CN 2208 an “Ethyl Alcohol” (S200) excise classification
would apply.
4.3.2 Consequences
In all reported cases within this group of products, there is a very large difference
between the excise taxes applicable when these particular products are classified as
I000 as opposed to being classified as S200.
Assuming an alcoholic strength of around 21-22% and depending on the Member State
where it is being sold, the difference in excise tax (VAT excluded) ranges from 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 then sold in Vodka style
packaging in the UK) of finished product.
A court decision involving one of the products described within this section recognised
that the purpose of the product, at 22% was to benefit from lower taxation.
14
15
Additionally, the impact on competition has been highlighted by the case law as well
as by other stakeholders interviewed in the context of the case study:
 Firstly, the erosion of distinctiveness of the higher strength spirit which the
products described in this category seek to imitate creates a quantifiable loss for
the producers of the drinks being taxed as 2208/S200.
 Secondly, the aspect of confusion of the consumers would further damage the
legitimate interests of the producers of the alcohols being taxed as 2208/S200.
16
Litigation results in significant costs for economic operators which will seek to
correct the perceived unfair competition by these products.
Similarly to the above categories, although not investigated within the scope of this
study, the point of view of the consumer may also reveal a negative consequence if the
expectations of consumers regarding these products are based on the assumption that
they are based on distilled rather than fermented alcohol .
17
4.3.3 Examples and Volumes concerned
Below are just a few additional examples of these types of products sampled from
Member States:
Croatia: An alcoholic drink with cherry flavour in a glass bottle of 500 ml obtained by
the fermentation of apple juice which produced 13.05% vol. and enriched with distilled
ethyl alcohol to the final alcohol content of 21%vol.
e.g. ECJ cases: C-150/08; C-532-14; C-533-14; UK case EWHC 17 (Ch) Diageo North America, Inc & Anor
v Intercontinental Brands; etc.
14
England and Wales High Court (Chancery Division)
15
“Due to a favourable customs classification, a 22% ABV drink of this type would attract much less duty
than spirits”
16
E.g. Vodka, Whiskey, Rum, Gin, Advokaat, etc.
17
As investigating these aspects has fallen outside the scope of this study, this theory cannot be confirmed
nor infirmed in the context of this evaluation.
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Ireland: Different brands which are marketed to appear almost as whiskeys, having an
alcohol concentration of 22%, often made of cleaned-up fermented alcohol base to
which distilled alcohol has been added.
Ireland: A golden-brown alcohol beverage at 21.9% manufactured using wine, sugar
and/or flavours. The apple wine corresponds to 51% bulk volume and 61% of alcohol
content.
United Kingdom: a 22% ABV product in a red get-up reminiscent of vodka. The front
label includes the words "Premium" and "Imperial Blend". The back label states in
relatively small print that the product is "a versatile blend of premium fermented
alcohol with vodka.
Poland: Fermented beverages which have undergone filtration, fortified with distilled
alcohol, to which flavours to change or strengthen smell or taste of the product have
been added.
Netherlands: ECJ case C-533/14 concerns a beverage called Ferm Fruit (the base
drink) with an alcohol percentage of 16%. This beverage is prepared with sugar syrup,
demineralized water, apple concentrate, minerals and vitamins. After mixing,
pasteurization takes place and wine yeast is added, as a result of which, the product
becomes an alcoholic product. The alcoholic product is cleared by means of, among
other things, ultrafiltration and has, therefore, a neutral taste, color and smell. It does
not contain distilled alcohol.
4.3.4 Legislative source of the problem and potential solutions
Due to the complexity of the problem and the similarities with products in other
categories, this causes and solutions are treated separately in section 5.
4.4
Beer to which alcohol from distilled origin is added
Mixtures of beer and spirits with recognisable increase in alcoholic strength: This type
of product has been identified as difficult to classify by two stakeholders: One example
was provided by authorities in Portugal while another example was provided by an
economic operator in the UK.
In both cases, the beer had not lost its character as beer, but had rather gained a
distinctive flavour of the aromatic substance spirit added (Tequila and Whiskey
respectively).
The first example is a beer at 5.9% containing “water, malted barley, glucose syrup,
corn, sugar, aromatic compounds (75% Tequila), citric acid, hop extract” while the
second product is a beer, at 8% ABV, which has been matured for 12 months in a cask
which previously had single malt whiskey stored within it. The beer grows in ABV, but is
then diluted with beer until it reaches 8.1% ABV.
4.4.1 Classification
The excise codes applicable in this situation are CN2203 and CN2208 while the excise
classification is, accordingly between “Beer” and “Ethyl alcohol”.
4.4.2 Consequences
The difference of excise duty applicable depending on whether the product is classified
as beer or ethyl alcohol is evident: in the two examples, it would range between
approx. 52 EUR/HL (in PT) and 279.18 EUR/HL (in the UK).
18
The estimation of financial risk is not accurate in this case, as it was not possible to calculate the excise
duty which would be applicable to the product in question (a beer at 5.9% alcohol) because the excise duty
on beer in Portugal is expressed according to degrees Plato. As such, this figure is estimation.
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The consequences of classifying such products go beyond the financial impact. In the
case of the beer matured in whiskey casks, the tax warehouse in question (as well as
some of its customers) had to adapt their authorisations as they were not allowed to
hold / receive S200 products under suspension of excise duty, leading to high
administrative costs and unexpected liability to pay tax resulting from releasing for
consumption of the product in question.
4.4.3 Legislative source of the problem and potential solutions
Article 2 of the Directive only foresees products of 2203 to be beer (or “any products
containing a mixture of beer with non-alcoholic beverages falling under CN2206”).
In the examples provided, it has been argued that CN code 2208, as it is defined, is
able to capture, as ethyl alcohol, a beer to which only an 0.1% ABV can be attributed to
alcohol of distilled origin, even though the vast majority of alcohol is sourced from the
fermentation of malt.
While this study has absolutely no authority to judge whether a given (or claimed)
classification is correct or not, from the examples provided in the context of this study,
we believe that the current legislative framework is sufficient to provide an
accurate determination of the products in question, and therefore we see no
systematic weakness of the Directive as regards to this issue which would
necessitate revision.
Below, we outline the legal considerations which we would deem as sufficient for an
unequivocal judgement in these cases.
As we recall the general rules for the interpretation of the CN (‘the general rules’),
which appear in Part One, Section I A, of the CN, provide inter alia:
‘Classification of goods in the [CN] shall be governed by the following principles:
1.
…
2.
…
(b)
Any reference in a heading to a material or substance shall be taken to include a
reference to mixtures or combinations of that material or substance with other
materials or substances. … The classification of goods consisting of more than one
material … shall be according to the principles of rule 3.
3.
When by application of rule 2(b) or for any other reason, goods are prima facie
classifiable under two or more headings, classification shall be effected as follows:
(a)
The heading which provides the most specific description shall be preferred to
headings providing a more general description. However, when two or more headings
each refer to part only of the materials or substances contained in mixed … goods …,
those headings are to be regarded as equally specific in relation to those goods, even if
one of them gives a more complete or precise description of the goods;
(b)
Mixtures … which cannot be classified by reference to 3(a), shall be classified as
if they consisted of the material … which gives them their essential character in so
far as this criterion is applicable.
In our assessment, and without prejudice to any decisions of the Member States and of
the courts, we believe that the current legislative environment should be sufficient to
determine the unequivocal classification of the products in question.
4.5
Wine based drinks (Flavoured wines and Aperitifs)
Several examples of wine based drinks were reported to be “difficult to classify”,
highlighting two distinct issues:
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1. The first group of examples referred to wine based drinks to which flavours
containing alcohol of distilled origin is added. According to the respondents reporting
these products, the characteristics of these examples remain that of wine, and alcohol
content is maximum 14%. - Usually, the added alcohol (from distilled origin) content is
between 0.5% and 1.2%.
2. Another category of products refers to flavoured wines, either mixed with fruit
aromas, subject to crio-extraction but remaining below 15%.
4.5.1 Classification
In both cases the products described will remain for customs purposes either CN 2204
or CN 2205.
However, the problems highlighted for the two types of products are different:
1. While for the first category (of wine flavoured with the addition of distilled alcohol,
but below 15%), some countries would consider the same product, for excise purposes
as W200 (“Other fermented beverages”) while others would consider it as I000
(“Intermediate beverages”).
2. In the second category (those of flavoured wines, to which no distilled alcohol is
added), they remain in the excise category of W200 (“Other fermented beverages”).
4.5.2 Consequences
1. This particular example does not concern a difficulty to classify a product within one
country, but the treatment of the same product in different Member States. As a result,
this is mainly an internal market issue; the same producer has the product classified
differently in different MS.
2. In the second example, competitive distortions as a result of differing excise rates
for products being argued to compete on the same market have been reported to be
the most important consequence. This relates to the treatment of certain products in
France, these products would arguably be perceived to be vermouths, competing on
the market of aperitifs but classified as W200, in the detriment of competing products
which are being considered to be I000. In this case, the financial difference, in terms of
excise duty is approximately 185 EUR/HL (3,77 € / hl vs 188,41 €/hl).
4.5.3 Examples and Volumes concerned
The example concerned in the second scenario presented in this section refers to the
treatment of a well-known and popular brand of vermouth in France
4.5.4 Legislative source of the problem and potential solutions
1. In the first set of examples, the issue at stake was that Art 12 (1) - the concept of
entirely fermented origin is being interpreted differently. Furthermore - Art 17 (2) where “Intermediate products” fall is interpreted differently by different Member States
It was reported that, in some Member States, the addition of flavours with alcoholic
content to a wine base product is possible without the loss of the excise classification as
W200. However, national legislation is not harmonized in this respect, leading to
situations where the same product is classified as an intermediate product in some
Member States and as a fermented beverage in others. As an example, it was reported
that in Spain, an addition of distilled alcohol to wine of 0.5% would be permitted
without changing the classification for excise purposes, while in Italy, a threshold of
1.2% is applicable. In this situation, a product which may be “Other Fermented
beverages” in Italy, will be an “Intermediate product” in Spain.
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The Directive should be clear to define the situation of adding flavours containing
alcohol to wine. In order to have uniformity in deciding at which point the product
becomes an intermediate product. To this respect the Directive should seek to clarify
the notion of “entirely of fermented origin” within the understanding of Articles 8, 12(1)
and 17. It should be noted that the problems reported in this section are different in
their scope and nature than those reported under the sections above, and a solution to
one may have unintended consequences on the evolution of the problems in the other
category.
2. The legislative source of the issue in the second example is the application of excise
legislation which classifies the products in question as such in spite of arguably sharing
similar characteristics and competing on the same market. No solution to this particular
issue can be found within the current legislative context.
19
4.6
Other issues
Finally, an inconsistency of the Directive has been reported in the context of this
evaluation, it refers to the manner in which sparkling wine is defined for excise and
customs purposes: Sparkling wine for excise purposes, defined in Article 8 (2) indent 1
requires a pressure of 3 bar or more while the equivalent CN codes require more than
2.5 bar. This mismatch between classifications should be resolved.
5.
Legislative source of the problems identified and
potential solutions
This section discusses the legislative source of the classification difficulties identified,
for the fermented beverages and those mixtures of fermented beverages which are
described in the sections above. Based on our analysis, an elaboration of the relative
advantages and disadvantages of potential solutions are also discussed.
It has been reported that the Directive does not take into account recent
developments in production methods and that, as the category “other fermented
beverages” leaves room for interpretation, these new products are often classified as
such although this was not intended by legislators.
In all provided examples, the taxation of these products as “ethyl alcohol” / S200, as
some of the stakeholders reporting the examples would argue, is not possible due to
the link between the customs classification and the definition of the excise
categories.
As Article 20 is currently defined, a classification, for customs purposes, as CN 2206, of
a product below 22% would automatically exclude it from it being taxed as “ethyl
alcohol”. This is a particular concern for those countries which feel obliged (or are
reluctant to challenge) a Binding Tariff Information (BTI) issued in another Member
State.
In at least one of the examples investigated in this study, it has been judged that the
main reason for the development and marketing of the product in its form and
production method was the link excise duty definition has with customs classification.
In the opinion of an UK Court: “due to a favourable customs classification, a 22% ABV
drink of this type would attract much less duty than spirits” . Interestingly, in the same
20
Aromatized wines, to which no distilled alcohol has been added as W200 on one hand and competing
products on the aperitif market as I000 on the other hand
20
Point 122 of Judgement of England and Wales High Court (Chancery Division) in Diageo North America, Inc
& Anor v Intercontinental Brands (ICB) Ltd & Ors [2010] EWHC 17 (Ch) (19 January 2010) available at:
http://www.bailii.org/ew/cases/EWHC/Ch/2010/17.html
19
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case, the court, despite finding the product in question to be unfairly competing and
damaging products being taxed as “ethyl Alcohol”/S200, the customs classification of
the product (CN 2206) has never been open to debate. This reinforces the view that
the link between the customs classification and the definition of the excise
categories is at the core of legislative sources of classification issues within this
category of products.
CN 2206 is defined as “Other fermented beverages, (for example cider, perry, mead);
mixtures of fermented beverages and mixtures of fermented beverages and nonalcoholic beverages, not elsewhere specified or included”. In accordance with the
general rules for the interpretation of the CN (‘the general rules’), which appear in Part
One, Section I A, of the CN, “Mixtures … which cannot be classified by reference to
3(a), shall be classified as if they consisted of the material … which gives them their
essential character”.
While the “Siebrand” case sought to clarify that the loss of the taste, smell and/or
appearance of a beverage produced from a particular fruit or natural product
would
result in a 2208 classification, in practice, the notion of essential character is extremely
difficult to determine and the determination of organoleptic characteristics is a
subjective element which opens the door to litigation and disputes between the
economic operators and the tax administrations.
21
22
Moreover, the fact that, in most countries, customs classification and excise
classification is attributed to different departments of the administrations (or even de
facto determined in another country, through the instrument of BTIs) further ampliifes
the perception of excise administrations that they are unable to exercise control over
the implementation of excise duty legislation.
Furthermore, the “Siebrand” case only applied to mixtures of fermented alcohol with
distilled origin. The ECJ expanded this argument to cover cleaned-up alcohol of fully
fermented origin through its judgement “Toorank” case.
23
In our assessment as evaluators of Directive 92/83/EC, however, these rather legalistic
considerations which take account of only the literal application and interpretation of
the provisions are a direct indicator of the lack of clarity of the Directive. As
necessary as these cases are to determine the correct legal interpretation of the
applicable legislation on a case by case basis, they do not fully reflect the core issue at
stake: namely that the nature, purpose and objective of the excise category of “other
fermented alcohol” is not clear to (and therefore, accepted by) stakeholders.
It is mainly the issue of which products are intended to fall within this category,
(thereby benefiting from a beneficial taxation) and which products are intended to be
excluded that is not fully passed on by the legislation. A message which is, arguably,
Case C-150/08; Siebrand BV v Staatssecretaris van Financiën
“Fermented alcohol-based beverages corresponding originally to heading 2206 of the Combined
Nomenclature in Annex I to Council Regulation (EEC) No 2658/87 of 23 July 1987 on the tariff and statistical
nomenclature and on the Common Customs Tariff, as amended by Commission Regulation (EEC) No 2587/91
of 26 July 1991, to which a certain proportion of distilled alcohol, water, sugar syrup, aromas, colourings and,
in some cases, a cream base have been added, resulting in the loss of the taste, smell and/or appearance of
a beverage produced from a particular fruit or natural product, do not come under heading 2206 of the
Combined Nomenclature but rather under heading 2208 thereof.”
23
Joined Cases C‑532/14 and C‑533/14, Judgement of the court of 12 May 2016, available at:
http://curia.europa.eu/juris/document/document.jsf;jsessionid=9ea7d2dc30d5d13eaa9703c04c2e89f4eb3d2
efaf410.e34KaxiLc3qMb40Rch0SaxuTahb0?text=&docid=178161&pageIndex=0&doclang=EN&mode=lst&dir=
&occ=first&part=1&cid=874565
21
22
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better conveyed, understood and accepted in relation to the categories of “Beer” and
“Wine” .
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5.1.1 Potential solutions
There are multiple possible actions which seek to address the classification issues
presented within the context of this study; however, it is clear that none of them can
be seen as a “silver bullet” that has the capability to resolve the issues identified
without any associated drawbacks. A set of measures which could be considered is
described in Table 1 below, together with their relative advantages and disadvantages.
The recommendations that this report finally makes takes into account the expected
consequences of each action.
Table 1: Potential actions to resolve difficulties in classifying products which
may arguably fall between CN codes 2208 and 2206
Member States
could
unilaterally
revise tax
rates and the
tax structure
for “other
fermented
beverages”.
At the moment, most Member States apply a similar amount of excise tax both
to “other fermented beverages” and to “wine”. This is in line with the initial
purpose of this category and the fair competition between traditional,
“acceptable” products belonging to the “other fermented beverages”
classification and those falling under “wine” and “beer”. Even the technical
specifications of the Excise Movement and Control System (EMCS) do not draw a
distinction between the two, whereas W200 applies to both excise categories (an
issue which should, arguably, be modified to take the existing different
categories into account).
To solve the dilemmas created by innovative products which it is generally
agreed should not benefit from the same preferential treatment, Member States
could unilaterally change the rate of excise tax of “other fermented beverages”
in order to bring the expected tax due under this category approximately into
line with that applying to beverages of similar strength and falling under “ethyl
alcohol”. Different tax bands could be established to pursue this objective (i.e.
between 2.8% and 4%, between 4% and 6%, between 6% and 10%, between
10% and 15%, between 15% and 22%, etc.).
The most important advantage of this solution is that it could be implemented by
the Member States straightaway within the context of the current EU legislative
framework. Changes to the taxation rates for “other fermented beverages” can
reduce or even eliminate the tax advantage that the products described above
have over competitors taxed as “ethyl alcohol” / S200.
However, there are several disadvantages to this solution: Firstly, and very
importantly, it erodes the very rationale for the establishment of the category,
which is to target certain products in the “other fermented beverages” category
whose taxation should be more in line with that of “beer” / ”wine” rather than
“ethyl alcohol”. This weakness could be partially mitigated by creating additional
tax bands for those products which the category is intended to target in this
way. For example, certain counties have such bands in place for cider and perry
(e.g. IE, PL, RO and the UK). However, such a mitigating action risks excluding
certain products, thereby creating further competitive distortions.
A second disadvantage is that the current specifications of the EMCS lack a
category for other fermented beverages, which it groups with wine as W200 in
the EMCS system. If Member States move away from an equivalence of taxation
between “wine” and “other fermented beverages”, an inconsistency in the EMCS
would be created that would require correction.
Finally, instituting such differences within the same excise category may make it
Despite the small number of cases, examples of products “difficult to classify” can be found within these
categories as well.
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Case Study Report - Classification
difficult to establish adequate guarantees when products of the “other fermented
beverages” category are moved under suspension of excise duty, as different
Member States may introduce different structures for taxing products within this
category.
Member States
could apply the
notion of
“entirely of
fermented
origin” more
strictly.
Article 17 (2) states that “Member States may treat as intermediate products
any still fermented beverage falling within the scope of Article 12(1) which has
an alcoholic strength exceeding 5.5% and is not entirely of fermented origin”.
This solution could be implemented immediately and unilaterally in the current
EU legislative context. It would avoid classifying some (albeit not all) products
falling within the category described above as “other fermented beverages”. It
would limit the tax advantage of these products to the difference in rates being
applied to “intermediate products” and “ethyl alcohol”.
As an extension to this solution, a revision of Directive 92/83/EEC could seek to
lower the threshold of 5.5% in order to capture more of the products described
above. However, this solution might have unintended consequences for the
treatment of certain products which could also be caught by this policy (e.g.
wine to which flavours containing alcohol had been added).
Member States
could
unilaterally
impose an
additional
excise tax on
ready-to-drink
products
(alcopops).
This measure is currently applied by France, which imposes a tax of 11 EUR per
decilitre of pure alcohol for alcohol beverages mixed with non-alcoholic products
or mixes of alcoholic products which have more than 1.2% but less than 12%
alcohol.
Add an
additional CN
note to provide
clarity as to the
correct
treatment, for
customs
purposes, of
fermented
products which
have lost their
essential
character.
This “additional note” at the 8-digit CN level would cover cleaned-up fermented
products, and would require them to be classified as 2208 – (i.e. the 8-digit CN
code level). This note would be defined thus: “products having lost the
organoleptic characteristics of a fermented beverage should be classified as
2208, independently of alcoholic strength”.
Like the solution immediately above, this one has the advantage that it could be
implemented by Member States immediately within the context of the current
EU legislative framework. The disadvantage is that such a unilateral move could
have unintended negative consequences for the proper functioning of the
internal market which are impossible to assess accurately in the context of the
present study.
In effect, this solution would seek to make the outcome of the Siebrand case
generally applicable, and would make it legally binding by introducing it into law
through the mechanism of an additional note. In order to adequately capture all
the variables of the issue, the additional note would have to apply both to
mixtures of fermented and distilled alcohol (such as Siebrand), and to “cleanedup” alcohol (i.e. alcohol derived from a fully fermented base, but which has also
been subjected to processing that has caused it to lose its essential character as
a fermented drink).
However, this solution does not solve the Member States’ difficulties with
applying subjective classification criteria (e.g. the determination of organoleptic
characteristics), nor does it eliminate the possibility that excise administrations
will have to continue to be restricted in their enforcement of excise law by the
classifications made by customs authorities (either in their own country or in
other countries). Nor does this solution eliminate the need for a revision of
Directive 92/83/EEC, as the effectiveness of this solution requires an
amendment of Article 26.
The Directive
could be
amended to
include a new
category of
excise
products that
would
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This measure would have the effect of creating a distinct category comprising
alcoholic beverages mixed with non-alcoholic products, or mixes of alcoholic
products falling under CN 2206, with the aim of establishing legal clarity
regarding the treatment of the “difficult to classify” products described in this
section. In order to avoid competitive distortions, the structure (and level) of
taxation should be in line with that applicable to “ethyl alcohol”.
The disadvantage of this solution is that it would increase the complexity of
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Case Study Report - Classification
adequately
encompass the
products
described.
excise law. For example, it would lead to an inconsistent situation where (all
things being equal, and assuming an equivalence of taxation of this new
category with that of “ethyl alcohol”) in some countries, intermediate products
might be taxed less per degree of pure alcohol than products falling into this
new category, despite having greater alcoholic strength.
Article 20,
indent 1 of the
Directive could
be amended to
bring products
falling under
CN 2206 within
its scope.
This solution would allow products falling under CN 2206 for excise purposes to
be treated as “ethyl alcohol”, thus requiring no changes to customs legislation to
resolve what is, arguably, an excise issue. However, such a solution would
require an additional amendment to Article 12 of the Directive in the form of
clear criteria describing the basis on which a CN2206 product would be
considered to be an “other fermented beverage” or “ethyl alcohol”. Such a
distinction requires the expression of the clear intention of the legislator as to
what should be considered fermented beverages for excise purposes.
An example of such a formulation could be: “products falling under code 2206
that have lost the organoleptic characteristics of a fermented beverage should
be classified for excise purposes as “ethyl alcohol”, independent of alcoholic
strength”.
This solution, however, faces the same practical difficulties connected with
assessing the organoleptic characteristics of a fermented beverage.
Introduce the
criteria
established by
ECJ cases into
the Directive.
This solution would see the criteria that were established in the landmark cases
of Siebrand and Toorank (or more operationalised versions of these criteria)
being inscribed in the Directive, thereby making them more coherently
applicable by ensuring they become legally binding. These criteria would involve
making the following considerations for classifying a product as “ethyl alcohol”
rather than “other fermented beverage” an integral part of the revised Directive:

Organoleptic (i.e. taste, sight, smell) characteristics of the products: If the
addition of water and other substances (such as syrup, various aromas and
colourings, and, in some cases, a cream base) results in a loss of the taste,
smell and appearance of a beverage produced from a particular fruit or
natural product (that is to say, a fermented beverage falling under CN code
2206), then the product would fall into the CN code 2208 category, placing it
in the “spirits” category for the purposes of excise duty.

The intended use of a product: this could comprise an objective classification
criterion if the intended use was inherent in the nature of the product. That
inherent character must be possible to assess on the basis of the product's
objective characteristics and properties, including its form, its colour and the
name under which it is marketed. If those correspond to the characteristics of
a spirituous beverage, then the product would fall into the CN code 2208
category, placing it in the “spirits” category for the purposes of excise duty.
This solution would provide clarity for Member States and increase the
uniformity of approaches across all the Member States by avoiding the uneven
application and enforcement of the ECJ criteria. However, if was not adequately
operationalised, this solution would not alleviate the practical difficulties of
Member States in applying these notions consistently and comprehensively.
6.
SOURCES
Desk



Research:
Case C-150/08: Siebrand BV v Staatssecretaris van Financiën
C-532-14 & C-533-14: Toorank Productions
Diageo North America, Inc & Anor v Intercontinental Brands (ICB) Ltd & Ors
[2010] EWHC 17 (Ch) (19 January 2010)
Interviewees:
May, 2016
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Member States Authorities:
 Katrien Z. Decubber, Belgian Ministry of Finance
 Rainer Holz, Bundesfinanzministerium (Germany)
 Helge Svendsen, SKAT, Denmark
 Marietta Loorents, Chief Expert, Estonian Tax and Customs Board, Tax
Department Excise Division
 Pia Kivimies, Ministry of Finance / Tax Department, Finland
 Aurelie Le Cam, Direction générale des douanes et des droits indirects (France)
 Zdravko Adamović, Head of Department, Customs Directorate, Sector for excise
duties and special taxes, Department for alcohol (Croatia)
 Marino Sučić, Senior expert advisor, Customs Directorate, Department for
classification and customs tariff, (Croatia)
 Angela Ogorman, Revenue; Excise Branch; Indirect Taxes Policy and Legislation
Division (Ireland)
 Ingrid Bellemakers - Policy advisor Ministry of Finance (customs and excise Netherlands)
 Hans van Herwijnen - senior policy advisor Ministry of Finance (excise Netherlands)
 Theo Jacobs - policy advisor Customs Directorate (excise - Netherlands)
 Ruud de Groot - Customs Laboratory, Customs Amsterdam - specialist in excise
products (Netherlands)
 Ed Tulp - Binding Tariff Information section, Customs Rotterdam - classification
specialist (Netherlands)
 Alexandre Simões, Chief of Unit for Alcohol and alcoholic beverages taxation
(Portugal)
 Jorge Pinheiro, Alcohol and alcoholic beverages taxation (Portugal)
 Chirs Gibbons, Senior Policy Advisor, Excise Alcohol Policy Team, HMRC (United
Kingdom)
Economic Operators:
 Richard Fuller, Fuller's
 Constance Balsam, Diageo
 Yashvé Perez, Codomiu
 James Mcilwraith, Solland
 Floch Claire, Euralia, Pineu de Charentes
 Joep Stassen, SpiritsNL
 Víctor Guarch, Tax advisor, Arola
 Katie McKelliget, CAMRA
 Nick Soper, Director - Internal Market & Sustainability, spiritsEUROPE
 Tom Sallis, The Scotch Whisky Association
 Les Norton, Group R&D Director, Halewood
May, 2016
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