USTR - U.S. Wins Mexico Beverage Tax Dispute
                 
The Office of the United States Trade Representative

U.S. Wins Mexico Beverage Tax Dispute
03/06/2006

WTO Appellate Body Upholds Panel Findings Against Tax

WASHINGTON - US Trade Representative Rob Portman announced today that the WTO Appellate Body has found in favor of the United States in its challenge of Mexico’s discriminatory beverage tax. Under the tax, soft drinks made with imported sweeteners, such as high-fructose corn syrup (HFCS) and beet sugar, are subject to a 20 percent tax on their sale and distribution. Beverages made with Mexican cane sugar are tax-exempt.

"This is a good result for our farmers and producers, who seek a level playing field," said Ambassador Portman. "The Appellate Body has confirmed that Mexico’s beverage tax is discriminatory and breaks WTO rules. It is clear that Mexico must eliminate this tax and restore fairness for our U.S. corn growers and refiners. We hope Mexico sees this decision as we do, as an opportunity to work together to quickly resolve all outstanding sweetener trade issues between us."

With the Appellate Body report, the WTO has now confirmed that Mexico’s beverage tax and reporting requirements discriminate against U.S. imports of HFCS, and that this discrimination is not justified under WTO rules nor does the NAFTA provide Mexico a justification to discriminate against U.S. exports.

Background

Mexico imposed the beverage tax on January 1, 2002. The beverage tax levies a 20 percent tax on soft drinks and other beverages, as well as on syrups and other products that can be diluted to produce soft drinks and other beverages ("soft drinks and syrups"). The beverage tax further imposes a 20 percent tax on services used to transfer soft drinks and syrups (e.g., distribution services). In addition, the beverage tax subjects taxed products to several bookkeeping and reporting requirements. The beverage tax only applies to soft drinks and syrups that use any sweetener other than cane sugar, such as HFCS or beet sugar. Soft drinks and syrups sweetened exclusively with cane sugar are tax-exempt.

In Mexico, cane sugar is almost exclusively a domestic product, whereas before the tax, HFCS accounted for 99 percent of Mexico's sweetener imports. Thus, by taxing soft drinks and syrups made with HFCS, but not those made with cane sugar, Mexico imposed a tax designed to discriminate against imports.

The beverage tax had an immediate effect on HFCS. Prior to its imposition, soft drink bottlers were the principal consumers of HFCS in Mexico and were increasingly substituting HFCS as a cost-effective alternative to cane sugar. The beverage tax reversed this trend as application of the beverage tax made the use of HFCS in soft drinks and syrups cost-prohibitive.

At the request of the United States, the WTO established the panel on July 6, 2004. Before the WTO panel, the United States claimed that the beverage tax is inconsistent with Mexico's WTO obligations under Articles III:2 and III:4 of the General Agreement on Tariffs and Trade 1994. The United States challenged the tax as applied on soft drinks and syrups, as well as on HFCS and beet sugar used to make soft drinks and syrups. The panel found in favor of the United States on all counts. The panel report was circulated to Members and the public on October 7, 2005. Mexico did not appeal the panel’s findings that its beverage tax is discriminatory and contrary to WTO rules that prohibit higher taxes on, and require no less favorable treatment for, imported products as compared to domestic products.

The NAFTA calls for duties that remain on a handful of products, including sugar, to be eliminated by 2008.

The United States and Mexico worked together last year to restart bilateral trade in sweeteners, with separate announcements made in September 2005 to allow imports of 250,000 metric tons of Mexican sugar into the United States and imports of 250,000 metric tons of HFCS into Mexico. Although Mexico's tax remains in place pending compliance with the WTO ruling, some bottlers are able to use these U.S. HFCS exports without being subject to the tax.

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