CJEC, February 27, 1980, No 170-78

The court

1 By application of 7 august 1978, the commission brought an action under article 169 of the eec treaty for a declaration that, by imposing on still light wine higher excise duty than on beer, the united kingdom has failed to fulfil its obligations under the second paragraph of article 95 of the eec treaty.

2 The commission recalls that before its accession to the community the united kingdom levied a customs duty on imports of wine and beer. By decision n°73-189-eec of 27 february 1973 (official journal n°l 197, p. 7) adopted in pursuance of article 38 of the act of accesssion the commission had authorized the united kingdom to retain for an additional period until 1 january 1976 the fiscal element of the customs duties in question. Those duties were subsequently transformed into excise duties applicable without distinction as to the origin of the product. During that transitional stage, the rates of duty underwent changes, owing both to amendments to the tax legislation of the united kingdom and to the accompanying introduction of value-added tax. The commission considers that as a result of those successive amendments the rate of duty on wine is clearly higher than the level of the fiscal element authorized in 1973 and that it has moreover undergone a marked increase in comparison with the rate of duty applicable to beer. In view of the competitive relationship between those two products, the commission considers that the tax system applied by the united kingdom is discriminatory and that as such it is of such a nature as to afford indirect protection to national beer production.

3 Essentially, the government of the united kingdom does not call in question the facts put forward by the commission, especially as regards the evolution in the rates of duty. It contests however that the application of the tax provisions in question can be considered contrary to the requirements of the treaty. First, it claims that wine and beer cannot be considered to be competing beverages and that there is therefore no substitution relationship, which is the condition for the application of the second paragraph of article 95. Secondly, even supposing that it were accepted that the two beverages referred to may be substituted for one another, the government of the united kingdom maintains that the tax system applied to wine is not protective in nature under the second paragraph of article 95.

4 As the arguments put forward by the parties have disclosed certain differences of opinion as to the scope and the interpretation of article 95, the court will as a preliminary examine those questions before discussing the submissions of the parties.

The interpretation of article 95

5 The aim of article 95 as a whole is to eliminate the adverse effects on the free movement of goods and on normal conditions of competition between member states of the discriminatory or protective application of internal taxation. To this end, the first paragraph of article 95 prohibits any tax provision whose effect is to impose, by whatever tax mechanism, higher taxation on imported goods than on similar domestic products. The second paragraph of article 95 applies to the treatment for tax purposes of products which, without fulfilling that criterion of similarity, are nevertheless in competition, either partially or potentially, with certain products of the importing country.

6 In order to determine the existence of a competitive relationship under the second paragraph of article 95, it is necessary to consider not only the present state of the market but also the possibilities for development within the context of free movement of goods at the community level and the further potential for the substitution of products for one another which may be revealed by intensification of trade, so as fully to develop the complementary features of the economies of the member states in accordance with the objectives laid down by article 2 of the treaty.

7 Where there is a competitive relationship between an imported product and national production characterized as stated above, the second paragraph of article 95 prohibits tax practices ' ' of such a nature as to afford indirect protection ' ' to the production of the importing member state.

8 It follows from the arguments put before the court that the parties are not fully in agreement as to the conditions for the application of that provision to this case. The commission has above all been concerned to show the difference between the tax burden imposed on the products in question. For its part, the government of the united kingdom points out that in the case of the second paragraph of article 95 it is insufficient to establish that there is a difference in taxation; the treaty requires that the protective effect of the tax system in question must be shown actually to exist. It considers however that this has not been shown.

9 It is true that the first and second paragraphs of article 95 lay down different conditions as regards the characteristics of the tax practices prohibited by that article. Under the first paragraph of that article, which relates to products which are similar and therefore hypothetically broadly comparable, the prohibition applies where a tax mechanism is of such a nature as to impose higher taxation on imported products than on domestic products. On the other hand, the second paragraph of article 95, precisely in view of the difficulty of making a sufficiently precise comparison between the products in question, employs a more general criterion, in other words the indirect protection afforded by a domestic tax system.

10 It is however appropriate to emphasize that the above-mentioned provision is linked to the ' ' nature ' ' of the tax system in question so that it is impossible to require in each case that the protective effect should be shown statistically. It is sufficient for the purposes of the application of the second paragraph of article 95 for it to be shown that a given tax mechanism is likely, in view of its inherent characteristics, to bring about the protective effect referred to by the treaty. Without therefore disregarding the importance of the criteria which may be deduced from statistics from which the effects of a given tax system may be measured, it is impossible to require the commission to supply statistical data on the actual foundation of the protective effect of the tax system complained of.

11 It is appropriate to appraise the facts of the case and the arguments put forward by the parties in the light of this interpretation of article 95.

The question of competition between wine and beer

12 According to the commission, there is a competitive relationship between wine and beer; in the case of certain consumers they may therefore actually be substituted for one another and in the case of others they may, at least potentially, be so substituted. The two beverages in fact belong to the same category of alcoholic beverages which are the product of natural fermentation; both may be used for the same purposes, as thirst-quenching drinks or to accompany meals.

13 The government of the united kingdom contests this attitude. Without denying the common characteristics of the two beverages, it emphasizes that they are both the products of entirely different manufacturing processes. The alcoholic content of wine is three times (11* to 12*) that of beer (3* on average). The price structure of the two products is entirely different, since wine is appreciably more expensive than beer. As regards consumer habits, the government of the united kingdom states that in accordance with long-established tradition in the united kingdom, beer is a popular drink consumed preferably in public-houses or in connexion with work; domestic consumption and consumption with meals is negligible. In contrast, the consumption of wine is more unusual and special from the point of view of social custom.

14 The court considers that the comission ' s argument is well-founded in that it is impossible to deny that to a certain extent the two beverages in question are capable of meeting identical needs, so that it must be acknowledged that there is a certain degree of substitution for one another. For the purpose of measuring the possible degree of substitution, it is impossible to restrict oneself to consumer habits in a member state or in a given region. In fact, those habits, which are essentially variable in time and space, cannot be considered to be a fixed rule; the tax policy of a member state must not therefore crystallize given consumer habits so as to consolidate an advantage acquired by national industries concerned to comply with them.

15 At the same time it is however necessary to recognize, together with the government of the united kingdom, the great differences between wine and beer from the point of view of the manufacturing processes and the natural properties of those beverages. Wine is an agricultural product which is the outcome of intensive farming methods and is closely linked to the properties of the soil and climatic factors; for that reason its characteristics are extremely variable, whereas beer, which is produced from raw materials less susceptible to risks of that nature, is at the same time better suited to methods of industrial manufacture. The difference between the conditions of production leads, in the case of both products, to price structures which are so extremely different that in spite of the competitive relationship between the finished products it seems particularly difficult to make comparisons from the tax point of view.

16 These differences between the two products disclose an aspect of the problem which forms the prerequisite for any legal appraisal and which has not been taken into consideration. In fact, according to the arguments which it put before the court, the commission seems to admit by implication that in a normal competitive relationship wine and beer should be subject to the same tax burden. This is also the concept which seems to be enshrined in a proposal for a directive on a harmonized excise duty on wine which the commission submitted to the council in 1972 (journal officiel n°c 43, p. 32). In the preamble to that proposal, the commission found that there were ' ' competition disturbances ' ' owing to the absence of excise duty on wine in certain member states. More recently, in the reply given by the commission on 4 january 1978 (official journal n°c 42, p. 35) to written question n°756-77 by mr pisoni, it produced a comparative table showing that in the wine-growing countries of the community wine production is entirely exempt from purchase tax or subject to a purely nominal excise duty, whereas it seems that in the member states in question beer is subject to tax. The commission did not indicate what it considers to be the appropriate tax ratio between two products which it regards as competing. However, it seems that an attitude on this preliminary question in terms enabling the effects of a decision of the court on the treatment for tax purposes of the two products throughout the community to be measured with sufficient certainty is a prerequisite for the solution of the proceedings brought against the united kingdom.

The method of comparison of the two products

17 In its reasoned opinion and when it lodged its application, the commission emphasized above all the fact that by equal volume wine is subject in the united kingdom to a tax burden approximately five times that of the burden imposed on beer. Since this criterion for comparison was keenly contested by the government of the united kingdom because the products involved have a different alcoholic strength, the commission put forward other criteria for comparison: first, the alcoholic content by unit of volume which once more shows heavier taxation on wine of the order of 50%; secondly, the relationship between the fiscal element and the price of the goods offered to consumers. The latter method of comparison also shows discrimination against wine. All these criteria of comparison are contested by the government of the united kingdom which considers that when relying simply upon volume it is necessary to compare the measures in which the two types of beverage are usually offered to consumers, in other words a ' ' glass of wine ' ' and a ' ' pint of beer ' '; in fact, those two typical units of consumption carry a tax burden which is approximately identical.

18 At the end of the written procedure, the court asked the parties to specify their own views and their observations on the other party ' s views as to the basis of calculation by which a comparison may be made between the tax burdens imposed on both products in question. The explanations supplied show that neither simply taking into consideration the volume of the two beverages nor a comparison between the typical units of consumption can provide a suitable basis for comparison. The same applies to a comparison based on the effect of the tax burden on the selling price of the two types of beverages in view of the fact that although it is relatively easy to ascertain an average price in the case of beer it is difficult to determine a representative basis for comparison in the case of wine, a characteristic of which is the wide range of prices.

19 Of the criteria put forward by the parties, the only factor which may enable an appropriate and somewhat objective comparison to be made consists therefore in the appraisal of the incidence of the tax burden in relation to the alcoholic strength of the beverages in question. By taking into consideration that criterion it may be ascertained that wine is at present subject in the united kingdom to a tax which is approximately 50% higher than that on beer, assuming that the alcoholic strength of the beverages is respectively 11* to 12* and 3* to 3.7*. It therefore seems that the tax burden imposed on those two products is not equal although the disparity is, according to that criterion, smaller than it seemed from the commission ' s first statements which were based on a simple comparison by volume. It is necessary to observe however that, according to the italian government, the difference is in fact greater since normal table wines, in other words precisely those which are likely to be in competition with beer, generally have an alcoholic strength of only 9* or 10*, which increases the margin of discrimination to approximately 125% or 100%.

20 In conclusion, and subject to the preceding observations on the ascertainment of an appropriate tax ratio between the two products, it may there- fore be stated that according to the only criterion whereby an objective, although imperfect, comparison can be made between the rates of tax applied to wine and beer, it seems that wine is subject in the united kingdom to a tax burden which is relatively heavier than that imposed on beer.

The question of the protective nature of the tax system in question

21 In this respect, the government of the united kingdom claims that according to the second paragraph of article 95 the commission should have examined the question whether the tax system complained of affords protection to national beer production. Instead of showing this, the commission has been exclusively concerned to show the disparity between the tax burden imposed on those two products. However, according to the government of the united kingdom, the tax system complained of did not prevent an increase in imports of wine during the period under consideration and the changes in the rates of duty have had no perceptible repercussions on the consumption figures, so that it is impossible to accept that the system of taxation applied is protective in effect.

22 For its part, the commission claims that a comparison with the volume of wine sales on other markets, especially in the benelux countries, shows that the marketing of the same product has been curbed in the united kingdom by the effect of the tax system in question. However, it criticizes above all from this point of view the fact that, after its accession to the community, the united kingdom, when transforming the former customs duties into excise duties, gradually increased the tax applicable to wine by a proportion higher than the tax imposed on beer whereas previously wine had long benefited from a certain tax advantage and the two products were approximately on a par from the point of view of taxation at the time when the united kingdom acceded to the community. Comparing the rates of duty on the two products on 1 january 1973 and on the date on which the application was lodged, on the basis of data supplied by the government of the united kingdom itself, the commission found in the case of wine a relative increase in the rate of duty of 102%, whereas in the case of beer it was only 59%.

23 According to the commission, this development corresponds moreover to a trend found in several other member states. In order to curb this development the commission issued on 5 december 1975 recommendation n°76-2-eec concerning the taxation of wine (official journal 1976, n°l 2, p. 13), drawing attention to the harmful repercussions of that development on the marketing of wines in the community and calling upon the member states concerned to reduce appreciably the rates of excise duties introduced and at the least to forgo any increase in the duties currently levied. The united kingdom took no notice of that recommendation. The commission added during the procedure that it is concerned to see that, through the effects of exaggerated taxation applied in certain member states, a product which is an ordinary consumer product in other member states is thus branded as a ' ' luxury product ' '.

24 The court considers that a comparison of the development of the two tax systems in question shows a protective trend as regards imports of wine in the united kingdom. However, in view of the uncertainties remaining both as to the characteristics of the competitive relationship between wine and beer and as to the question of the appropriate tax ratio between the two products from the point of view of the whole of the community, the court considers that it is unable to give a ruling at this stage on the failure to fulfil its obligations under the treaty for which the united kingdom is criticized. It therefore requests the commission and the united kingdom to resume examination of the question at issue in the light of the foregoing considerations and to report to the court within a prescribed period either on any solution of the dispute which they have reached or on their respective viewpoints, taking into consideration the legal factors arising from this judgment. The intervener will be able to present its observations to the court at the appropriate time.

On those grounds,

The court,

Before giving judgment on the application lodged by the commission for a declaration that the united kingdom has failed to fulfil its obligations, hereby:

1. Orders the parties to re-examine the subject-matter of the dispute in the light of the legal considerations set out in this judgment and to report to the court on the result of that examination before 31 december 1980. The court will give final judgment after that date after examining the reports which have been submitted to it or in the absence of those reports.

2. Reserves the costs.