Regulatory Developments In the past five years, market conditions for the sale of European liquor have been substantially improved through a series of reforms and deregulation. In compliance with WTO rulings, the Government of Japan reduced the gap in liquor tax rates between domestically produced distilled liquor or shochu and imported liquors. By 2002, Japan had eliminated tariffs on whisky, brandy, vodka, rum, liqueurs and gin. This progress was followed in 2003 with an attempt to deregulate retail channels by eliminating requirements for minimum distance requirements between retail licensees. The deregulation was temporarily undermined by the designation of large numbers of "Urgent Adjustment Areas" to which the deregulation did not apply. Fortunately, by September 2006, such exceptional procedures were discontinued and the deregulation of retail channels was uniformly applied. In 2006, the Ministry of Finance launched a program aimed at long-term reform of the liquor tax regime that entails streamlining of tax categories and an adjustment of the tax rates. The goals envisioned by the reform program are positive, but certain provisions of the program, including the current system of product categorization do not comply with WTO rulings and international standards. The Ministry of Finance has made clear its long-term goal of putting wine and Japanese sake in the same category, ignoring fundamental differences between the two products. The EBC fears that this intention is in contradiction to the 1998 WTO ruling, which prescribes that the level of substitutability in terms of production and consumption should be the overriding determinant when setting tax categories for alcoholic beverages. In contrast, the EU, US and Australia have implemented the WTO provision so that spirits, beer, wines and intermediate products are placed in separate general categories complemented by specific categories for country-typical products. The lack of accurate product definitions and categorization for taxing purposes indirectly protects domestic producers and in the long term, will limit competition from European businesses. Prospects for EU-Japan Economic Integration Europe is the leading exporter of liquor and wine worldwide. The Japanese liquor market is one of the largest in the world with estimated annual liquor sales of 6 trillion yen and a growing wine consumption. Despite such figures, in terms of volume, foreign imports account for only 3.7% of the total Japanese liquor market (including beer and beer like products) while Japanese producers account for almost 96.3% of the total market share. The Government has implemented a notable reduction in taxes. However, Japan lags behind in the application of international standards of product definition and elimination of non-tariff barriers to market access. Priorities
Key Issues and Recommendations ■ Product definition Yearly status report: no progress. Product definitions for alcoholic beverages are broad and do not comply with internationally accepted product specifications that are based on production methods and geographical indications. Many brands of Japanese liquor marketed under the name of "whisky" and "liqueur" would not qualify as such products in Europe. Domestic products like Sochu and Sake products are not subject to the same rate of liquor taxes as authentic whisky, liqueur and cognac imported from Europe. This provides domestic producers with a competitive advantage in terms of lower costs. Such inaccurate use of definitions gives domestic producers an unfair competitive advantage, misleads Japanese consumers and undermines the quality and brand integrity of the genuine European liquor. Recommendation:
■ Licensing Yearly status report: progress. In 2006, licensing requirements for retail channels such as minimum distance and population quotas were abolished. However license applications for wholesale and retail continue to be complex and are not processed in a clear, transparent and consistent manner. Recommendation:
■ Liquor tax Yearly status report: no progress. The current liquor tax regime is complex with 10 different tax rates applied to beers, wines and spirits. The Ministry has announced an intention to apply the tax rate on sake to wine, a change that may increase the current tax from 80 yen to 120 yen per litre. Recommendation:
■ Tariffs Yearly status report: no progress. The Japanese Government has drastically reduced the tax rate on non-shochu liquor over the past five years in compliance with a WTO ruling issued in 1996. However, certain tariffs are still applied to Sparkling Wine, Still Wine, Sherry, Port and Fortified Wine. Recommendation:
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