The U.S., the European Union, and Switzerland are challenging the legality of excise taxes on carbonated and energy drinks by Bahrain, Saudi Arabia, and the United Arab Emirates.
The three Gulf countries began applying a 50 percent excise tax to carbonated drinks except water and a 100 percent tax to energy drinks and tobacco products in 2017. The Kuwaiti government said in May that it would accelerate plans to impose similar measures.
The measure is supposed to reflect the impact on health but is actually “discriminatory,” with shoppers opting for similar local products that are now cheaper, said Taina Sateri, a trade counselor at the EU delegation to the UAE in Abu Dhabi.
“Consumers have not necessarily reduced consuming these products but have changed their consumption habits to similar types of products which have escaped the tax,” Sateri said in a July 19 email.
The EU has been raising the issue with its Gulf Cooperation Council partners since the GCC framework agreement came to light in 2016, according to Lucie Berger, head of trade and economic affairs in the GCC at the EU delegation in Riyadh.
After months of fruitless bilateral negotiations, the U.S., EU and Switzerland turned to the World Trade Organization, most recently at the Council for Trade in Goods on July 3.
“Since the introduction of the selective tax, the industry has noted considerable decline in sales of their products,” Berger said in a July 20 email. The tax had a “severe impact” on the sales of energy drinks in Saudi Arabia and slowed sales growth in soft drinks, Euromonitor confirmed in February.
Consumers are “shifting to cheaper products that contain often higher level of sugar and other ingredients such as caffeine,” Berger said, adding that the 50 percent and 100 percent tax rates are “unprecedented” and far exceed the 20 percent recommended by the World Health Organization.
“Without scientific evidence, it is difficult to understand why some products have been included—such as sugar free products, or flavored carbonated water—while other products are not subjected to the tax, such as juices or caffeinated drinks,” she said.
“The EU understands the need to promote a healthy diet through a variety of tools, taxes included. Taxes should ideally be designed in a way to help consumers make healthier choices, while this particular tax might potentially be discriminatory, pushing consumers towards cheaper—and not healthier—alternatives,” she added.
While the Gulf states argue that the excise taxes are designed to protect health and the environment, not to shield local industries, they don’t fulfill that aim, Sateri said.
“The tax is based on carbonization, whereas there are many non-carbonated drinks with high sugar content not taxed,” said Sateri.
However, flavored carbonated drinks continue to be taxed despite having almost no sugar content. “If health is used as a reason then the range of products would need to be modified. Similarly the energy drinks are taxed at 100 percent but there are many caffeinated drinks on the market with higher caffeinated levels which do not fall under the tax,” Sateri said.
The dispute could take some time to resolve, leaving other Gulf states unable to advance their own tax plans, said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai.
“The claims could pose a serious challenge to the GCC Excise Tax and may prevent the other GCC states from implementing it in its current form,” Vanhee said in a July 19 email.
He noted that under the WTO dispute settlement system, the issue is currently in the consultation phase. If no mutually agreed solution in line with the WTO agreement is found, the case will be referred in a first stage to a WTO panel.
“A potential ruling is binding on the WTO members. The majority of WTO disputes get resolved in the consultation phase,” Vanhee said.
Coca-Cola Co. declined to comment. Austrian-based energy drink manufacturer Red Bull didn’t respond to a request for comment.