CEPS POSITION CROATIA TRADING CONDITIONS FOR IMPORTED SPIRITS REMAINING AREAS OF CONCERN WHERE ACTION SEEMS NECESSARY PRIOR TO

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1 CP.MI ANNEX 09/08/2012 CEPS POSITION CROATIA TRADING CONDITIONS FOR IMPORTED SPIRITS REMAINING AREAS OF CONCERN WHERE ACTION SEEMS NECESSARY PRIOR TO ACCESSION TO MEET THE EU ACQUIS The European Spirits Organisation CEPS is the representative body for the spirits industry at European level. Its membership comprises 30 national associations of spirits manufacturers representing the industry in 26 countries, as well as a group of leading spirits producing companies. In an effort to provide the Commission with an indication of the issues where Croatia s national legislation was not in line with the EU acquis, detailed dossiers were submitted in autumn 2008 and 2010 (CP.MI of 30 October 2008 and CP.MI of 7 September 2010 refer). Since then a number of improvements have taken place and we are very grateful the Croatian authorities have taken the necessary steps to update their regulatory framework to implement and enforce the acquis. From the point of view of the EU spirits industry, a few key areas, details of which are set out below, remain where additional work appears to be necessary in advance of Croatia s EU accession on 1 July CHAPTER 11 - AGRICULTURE AND RURAL DEVELOPMENT a. Local Rum and Brandy In mid-2009, Croatia enacted a new law defining spirit drinks which sought to bring national legislation more in line with the EU acquis, i.e. Regulation 110/2008. This was, naturally, very welcome and the new legislation removed a number of inconsistencies between Croatian and EU law. Regrettably, however, the most serious incompatibility with EU law was not addressed. CEPS and its members have repeatedly stressed concerns at the production and sale of spirits in Croatia that use defined terms but do not meet the requirements of those definitions. The most particular difficulties relate to domaci rum and domaci brandy (domaci = domestic). In the former, Croatia s legislation allows this to be, essentially, neutral alcohol plus flavourings. With regard to the latter, the law requires a minimum of 30% wine distillate. Rue Belliard 12, bte 5 B-1040 Bruxelles T F info@europeanspirits.org

2 The use of sales denominations rum and brandy on products which do not comply with EU definitions misleads consumers and distorts competition against genuine products. Although Croatia withdrew its request for a 7 year transition period to continue to produce and sell domaci rum and brandy, and therefore such products should no longer be on sale from July 2013, we have not seen any information to demonstrate how this will happen. Recent reports from the trade in Croatia confirm there is no sign of any steps being taken to ensure such products are no longer on sale following accession. In principle the products domaci rum and domaci brandy will need either to be re-labelled as spirit drinks or re-formulated so that they comply with the definitions of rum and brandy in the EU spirits drinks Regulation (110/2008). As the latter will take effect in Croatia from 1 July 2013, no non-complying products should be on sale at that point. CEPS believes it will be extremely important to establish what plans, if any, are being developed, or are in place, to ensure that misleadingly labelled spirits, domaci rum and brandy in particular, are removed from shelves by the time of accession. Can the Commission help, please? b. Other Concerns with Local Legislation Defining Spirit Drinks As the 2008 and 2010 submissions indicated, there are a large number of other anomalies in Croatia s current law defining spirit drinks (Decree 1405 (Official Gazette 61/09), section 7 in particular). From our discussions with the Commission, we understand that, in principle, these will be addressed through the direct application of Regulation 110/2008 from the time of accession. Naturally, CEPS is very keen to see the EU acquis in this area applied and enforced at the earliest opportunity. CEPS hopes that the Commission can reiterate to the Croatian authorities the importance of all spirit drinks in the market fully complying with the requirements of Regulation 110/2208 from the time of accession. CHAPTER 16 - TAXATION a. Possible State Aid As you may recall from our 2008 and 2010 submissions, and subsequent correspondence (also with the Croatian authorities), our sector was concerned that some distillers in Croatia did not pay excise tax. Our main (but not sole) concern focussed on the state-owned Dalmacijavino distillery in Split which appeared to have been operating under preferential trade conditions for many years; there were regular reports that, in effect, its brands had not been subject to excise tax for as much as a decade. Reports suggested that the state-owned distiller, located in an area considered to be economically precarious, had had its operations subsidised and that, each year, the excise liability was simply added to its debt to the government. All traders reported their serious concerns at the apparent distortion of competition which resulted from what appeared to be preferential trading conditions for the state-owned entity. 2

3 In 2011, CEPS raised the industry s concerns with the Croatian Competition Authority, Finance and Agriculture Ministries as well as the Prime Minister s office. Among other things, we provided information showing the large and growing level of indebtedness of the company to the Croatian state. The responses suggested, however, that while state assistance had been provided regarding the relocation of the distillery, it had not received any state aid in the last couple of years. While we understand that the distillery has not operated for many months, efforts are thought to be continuing to privatise the firm. Press reports suggest that in the event that happens, the outstanding debts might be written off by the government. If that was to happen, we believe it would be tantamount to state aid. It would be greatly appreciated if the Commission was able to seek confirmation that all spirits traders in Croatia will operate under the same competitive conditions. It would be particularly helpful if the Commission could please ensure that no local companies / distilleries in Croatia are provided financial assistance / state aid or other preferences which enable them to compete against other EU producers that do not so benefit. b. Home distillation In common with many other European countries, home distillation is a long established tradition in Croatia. Regrettably, however, and again in common with many other EU Member States, while the distillates are intended to be for personal consumption, there is considerable leakage into commercial channels. Traders reported that while home distillates are never found in the major retailers, not least as a consequence of the high costs of listing in such outlets, they are regularly available in the 'off-trade' (restaurants, bars, etc.). In addition, they are frequently available in tourist areas, with farms and households openly displaying signs that distillates are for sale. Furthermore, home distillate (rakija) is found in souvenir packaging in tourist shops, with some traders reporting that this can be easily identified as not having been subject to the normal Customs / excise controls due to the absence of a strip stamp. It is understood that while stills used for home distillation need, in principle, to be registered, no records are required to be kept of the quantities of raw material used or distillate produced. In addition, while home distillers were traditionally exempt from excise tax, the accession negotiations concluded that Croatia could invoke article 22.4 of Directive 92/83; this, in essence, requires households to pay a small, flat-rate fee and thereby maintain their tax-free status. (Small distillers who produce less than 20 lpa per year pay according to the capacity of their stills: between 40 and 100 litres - HRK 100 ( 13.3); and over 100 litres - HRK 200 ( 16.6). It is not known if this is enforced. We also understand that there is no mechanism by which the output of home distillation is limited to personal consumption, i.e. rather than being sold commercially. More generally, CEPS supports the principle of identical excise tax being applied on all spirits, i.e. despite the derogations granted for various other EU Member States. We 3

4 hope therefore that, in common with some other recent accession countries, there can be a review mechanism to enable the Commission to assess the application of the facility for home distillers. CEPS therefore hopes the Commission will impress upon the Croatian authorities the need for a robust registration system for all domestic stills and also a mechanism to determine the quantities produced, with limits put in place to ensure any excess cannot be sold commercially. In addition, a review mechanism should be agreed so the regime's effectiveness can be assessed and, if required, adjustments made. c. Duty Deferment Duty deferment provisions, requiring excise to be paid by the 15 th day of the month following the month of release for consumption, are non-discriminatory. Traders nonetheless report that the deferment provisions give rise to significant difficulty. In principle, duty deferment provisions enable traders to have been paid for their goods before they are required to pay the relevant excise tax to the government. In most EU Member States, therefore, the duty deferment period bears a close relationship to the usual payment delays in the market. In the case of Croatia, however, traders report that payment delays are typically 4 6 months (which is excessively long). Despite this, excise tax is required to be paid to the government within 1½ months, and traders are therefore obliged to finance the remaining period until they receive payment for the spirits sold. Not only can this lead to cash flow problems for existing traders, but it acts as a barrier to market entry for potential newcomers (often SMEs). You may wish to note that Croatia enacted legislation requiring, from the start of 2012, payments terms to be a maximum of 60 days, subject to fines if exceeded. In mid-july traders reported this had made no difference to previous practice; for spirits the payment delay remains between 4 and 6 months and is a significant problem for the industry. CEPS hopes the Commission may be able to explore with Croatia means through which either duty deferment provisions are extended or the extremely long payment delay culture improved. CHAPTER 28 - CONSUMER AND HEALTH PROTECTION a. General Labelling The lack of clarity in Croatia s labelling law continues to be an area of concern. One aspect of particular interest relates to the requirement, in certain circumstances, for some spirit drinks to label ingredients. The provisions of Decree 1405 (Official Gazette 61/09) seem to require (in article 39, notably subparas 4 and 5), that ingredient listing for some spirits is required. The legislation is imprecise, however, and the penalties for contravention high, so some 4

5 importers have taken the precaution of listing ingredients on all the spirit drinks they trade, whether or not they might be required to do so under the law. This is a marketspecific, expensive and time-consuming process, involving the addition of a back label on every bottle in the warehouses. The current uncertainties mean that, following accession, spirit drinks moving freely throughout the rest of the EU, will not enjoy the same market access in Croatia. There is an exemption from ingredient listing for all alcoholic beverages in Directive 2000/13. This has been retained in Regulation 1169/2011, subject to a review after three years. As a new EU Member State, we very much hope Croatia will implement and enforce the requirements of Directive 2000/13 (and then Regulation 1169/2011) on food information for consumers. This being so, we hope it will remove its current ambiguous provisions which seemingly require ingredient listing for some spirits in certain circumstances. A separate area of concern relates to a number of additional environmental labelling requirements in the market. - All products are required to include a recycling logo, comprising 2 arrows in parallel, one pointing in each direction. - A further requirement on glass bottles is the indication GL (for glass) as well as a number denoting the colour of the glass. Regarding the latter, it appears that Croatia has used the scheme set out in Commission Decision 97/129; within the EU such markings are optional rather than mandatory. - Finally, Croatia requires the indication of a deposit (0.5 Kuna) which is the amount reimbursed to consumers on return of the bottle. While such deposit and return schemes are understood to operate satisfactorily on a local level where bottles are returned for cleaning and refilling, it is certainly not appropriate for internationally traded products. As with the ingredient labelling legislation, the environmental details on labels in Croatia will, if still in place following accession, act as a barrier to the free movement of spirits from other Member States. It would be much appreciated if the Commission could please urge Croatia to bring its labelling legislation in line with Directive 2000/13 (Regulation 1169/2011) at the earliest opportunity. In addition, CEPS very much hopes the Commission will be able to persuade Croatia that the additional environmental labelling requirements act as obstacles to the free movement of goods from other EU Member States, and that they should therefore be removed. b. Lot Codes CEPS has received reports of products on sale bearing no lot code, even though the Croatian law (in Official Gazette 63 in June 2011) requires it to be shown on all packages. While there are inevitably a variety of reasons why spirits may be on sale without a lot code, any such products nonetheless are a potential threat to consumer protection and a violation of the requirements of Directive 2011/91 which, in the 5

6 interests of facilitating product recall when that is necessary, requires all foodstuffs on sale to bear a lot code. It would be very helpful if the Commission was able to urge the Croatian authorities to be vigilant regarding the requirement for all foodstuffs to bear a lot code and to take action where products not bearing a lot code are found in the market. CHAPTER 29 - CUSTOMS UNION Tariffs Most EU spirit drinks are already able to secure tariff-free access to Croatia, and this is greatly appreciated. There are, however, a few residual tariffs on certain plum spirits. These tariffs apply at a rate of 12.5% above the quota of 17 tons. CEPS naturally hopes that Croatia will be ready to remove all remaining tariffs and quotas at the earliest opportunity, and by the time of EU accession at the latest. CONCLUSION In general, CEPS has been very grateful for Croatia s readiness to endorse various parts of the EU acquis and to have removed a significant number of earlier barriers. Nonetheless, some issues remain on which further action would appear to be necessary by, at the latest, the time of Croatia s EU accession. Of particular concern are: - The local (domaci) rum and brandy need to be either re-labelled or re-formulated so that consumers are not misled and the current distortions of competition with legitimate products are removed; - Clarity is required regarding the status of a major state-owned local distiller; - Controls on home distillation require to be strengthened; - Labelling rules need to be improved so that inconsistencies with EU rules are resolved and a number of market-specific requirements, notably in the environmental field, are removed. We hope the Commission will feel able, please, to raise these concerns with the Croatian authorities in an effort to ensure that trading conditions upon EU accession are fully compatible with the acquis. Naturally, CEPS stands ready to provide any assistance that may be required. If the Commission would like any additional information regarding any aspect of the foregoing, please do not hesitate to get in touch. We look forward to continuing to liaise with the Commission and Croatian authorities as preparations for EU membership proceed. Brussels August