Classification of Drinks under Codes 2206 or 2208 Majority Test Proposal March 19, 2005 1.

. There are certain products where there is doubt over whether they should be classified under HS 2206 or 2208. Throughout the EU, fiscal definitions of alcohol beverage products are based on customs classifications. Fiscal rates for products classified under Harmonized System (HS) Code 2208 (distilled) are normally higher than those for HS 2206 (other fermented beverages). Some products currently classified under 2206 may risk being reclassified under 2208 where the "essential characteristics" of the fermented beverage are determined not to have been preserved -- a situation that has led to inconsistent classifications of the same product in differing EU member states. 2. A proposed guiding rule would clarify the existing rule and bring precision to this area. In cases of doubt whether a beverage should be classified under 2206 or 2208, the determination would be made depending upon whether the distilled or fermented alcohol component contributed more to the alcohol content of the finished product. A majority test would apply to all fermented beverage mixtures where there is doubt concerning their classification, regardless of how they were manufactured. This test would not apply to those well-established HS 2206 products with or without added alcohol specifically included in the 2206 headnote or incorporated into the headnote by reference in the HS Explanatory Note to 2206. It would also not apply to more highly refined fermented beverages that are not mixtures and to fermented beverages under other headings (e.g., 2203, 2204, etc.) that include products similar to those in 2206. The Fermented portion would be evaluated based on whether the beverage retained the requisite constituent elements of fermented beverages (e.g., glycerol possibly with other chemical components). Why a majority test? A 50% test brings an objective dispositive method of determining the "essential character" of the finished product, rather than focusing on either subjective determinations or production processes. This rule allows for future product innovation and has been adopted by some EU member states, by some countries and has been applied by the EU in other product areas, such as fruit juices. 3. This approach could be implemented using a "mutual recognition" type approach via a Binding Tariff Information (BTI) process. BTIs constitute authoritative sources for the appropriate and uniform classification of products and provide a basis for ancillary legal determinations (e.g., fiscal determinations). BTIs issued by national authorities should definitively establish the appropriate tariff category throughout the EU, providing for an automatic certification process, ensuring ease of administration and lessening the burden on revenue authorities. While there are inadequacies with the BTI system (e.g., some national authorities do not recognize the BTIs of other member states), the EC may well address deficiencies in the face of the impending WTO case charging discriminatory problems with this system. 4. Producers would be obliged to keep appropriate records. Producers must already maintain records demonstrating the basis for the classification numbers (e.g., product specifications) consistent with already existing requirements under the EU General Food Law on traceability, as well as certification requirements. Normal penalties would apply in the event of fraud or misrepresentation. 5. It is necessary to ensure non-EU producers are truthful in their customs declarations. EU authorities may be suspicious of products being imported into the EU from other countries, especially since analytical tests reportedly cannot distinguish definitively between molecules derived solely either from fermentation or distillation. Other tests may be able to provide authoritative results as to whether a producer is being truthful (e.g., isotopic analyses). Thus, testing can be used in conjunction with appropriate certification to ensure producers attest truthfully to the composition of their products. The EU could impose requirements for compliance on EU importers or, as a fallback, require reliance on approved laboratories in the exporting country.