A tax exemption for Canadian wineries has drawn the ire of the European Union, which has hauled Canada before the World Trade Organization in a case some say could lead to action against similar programs in the United States and Australia.
At issue is Canada’s decision last year to exempt wines made entirely from domestic grapes from paying excise tax.
The EU complains that the measure, which took effect July 1, 2006, is “discriminatory” against wines from Europe because excise taxes on wines made from foreign grapes remained. In fact, the rate increased to 62 Canadian cents a liter from 51.22 cents a liter.
The tax adds approximately 46.5 cents to the price of a bottle of wine made with foreign grapes, whether blended with domestic juice in Canada or imported, while domestic producers stand to see a tax break of approximately $10 million.
That averages out to approximately $20,000 to $25,000 annually for each of the country’s 260 wineries.
“This measure is unfair, and I urge Canada to end this discrimination against our products,” said Mariann Fischer Boel, the EU’s commissioner for agriculture and rural development, in a statement last November.
While the industry in Canada feels picked on—the Canadian Vintners Association notes that the EU subsidizes its own producers to the tune of $2 billion a year and has never challenged “similar” tax rebate programs in the United States and Australia—the complaint may have some merit.
The Canadian Vintners Association argues that the tax exemption in Canada took its lead from U.S. policy, but the U.S. program operates through a system of tax credits that merely reduce excise taxes, whereas Canada’s provides an outright exemption.
More important, the exemption treats domestic and foreign product differently.
“If they change their tax rate based on where the grapes come from, that does not sound WTO-consistent to me,” said Robert Hamilton, trade representative for Washington State’s governor. Hamilton undertakes an annual review of agricultural trade barriers, and said giving preferential treatment to domestic products wouldn’t fly in Washington State.