Attorney Gil Nadel, Attorney Omer Wagner
It was recently reported that the Minister of Finance raised the sales tax rate on beer from NIS 2.18 per liter to NIS 4.19 per liter[1] and in light of this, local producers of beer claim that they will not be able to withstand such a tax raise[2].
Likewise, it was reported that the Minister of the Interior, Eli Ishay, sent a letter to the Minister of Finance, asking him to exclude the beer producers from this raise.
But is it permissible for a country to discriminate between sales taxes on locally made beers and sales taxes on imported beers, in the name of protecting local production?
The country uses taxation as a means of protecting local industry from competition. Sales tax, on the other hand, is a sort of 'luxury' tax, charged uniformly and equally upon both locally made products and imported products.
Israel has signed a number of various international treaties, among them the GATT agreement which prohibits the negative discrimination of imported goods, as opposed to locally made goods, by means of local taxation.
An example of such discrimination would be creating a category of lower taxes and higher taxes, whereby local products and imported products could theoretically be placed in both categories, but in practice imported products would usually be placed in the higher category. In this case it could be argued that this is a form of discrimination unless the country can testify to a legitimate purpose for the tax method.
An example of discrimination that has been done away with, can be found in the sales tax that was placed on vodka and other products. Until January 2010, all vodka that cost up to $5 per liter was taxed by 75% and any vodka more expensive than that was taxed by 120%.
Since this gave rise to complaints of prohibited sales tax discrimination, especially since it was mostly foreign vodka that carried the higher tax, the country was forced to change the method and began a gradual process for collecting a defined sales tax based on alcohol content, regardless of worth- an undiscriminating, equal process.
Another example of sales tax discrimination for the sake of promoting a legitimate goal is apparent in the tax placed on the beer itself. Regular beer, whether local or imported, has a defined sales tax of NIS 4.19 for a liter of alcohol, whereas beer sold in a bottle intended for reuse and containing up to 3.8 alcohol, is exempt from sales tax.
Another possible attempt at discriminating in favor of a local product is claiming that the local product and the imported product are not identical. Let us recall one incident that reached the Worldwide Trading Organization (WTO), regarding a claim that Japan had breached the GATT agreement by placing a different sales tax on a Japanese alcoholic beverage, called Shochu, made from barley, potatoes, sugar cane and rice, as opposed to other imported beverages such as vodka, whiskey, etc.
In this case, Japan claimed that the Shochu beverage is not an identical product to the imported beverages, therefore this was not a case of tax discrimination, but the WTO rejected this claim and determined that these are in fact competing products produced from similar ingredients, and there is no basis for discriminating between them in local taxes (sales tax).
In the bottom line, we believe the government will not be able to legally implement a negative discrimination in the sales tax of foreign made beers as opposed to locally made beer, and any such procedure is sure to be closely scrutinized by the countries that export beer to Israel.
[1]http://www.ynet.co.il/articles/0,7340,L-4260598,00.html
[2]http://www.ynet.co.il/articles/0,7340,L-4266744,00.html
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