A tax exemption for Canadian wineries has drawn the ire of the European Union, which has hauled Canada before the World Trade Organization in a case some say could lead to action against similar programs in the United States and Australia.

At issue is Canada’s decision last year to exempt wines made entirely from domestic grapes from paying excise tax.

The EU complains that the measure, which took effect July 1, 2006, is “discriminatory” against wines from Europe because excise taxes on wines made from foreign grapes remained. In fact, the rate increased to 62 Canadian cents a liter from 51.22 cents a liter.

The tax adds approximately 46.5 cents to the price of a bottle of wine made with foreign grapes, whether blended with domestic juice in Canada or imported, while domestic producers stand to see a tax break of approximately $10 million.

That averages out to approximately $20,000 to $25,000 annually for each of the country’s 260 wineries.

“This measure is unfair, and I urge Canada to end this discrimination against our products,” said Mariann Fischer Boel, the EU’s commissioner for agriculture and rural development, in a statement last November.

While the industry in Canada feels picked on—the Canadian Vintners Association notes that the EU subsidizes its own producers to the tune of $2 billion a year and has never challenged “similar” tax rebate programs in the United States and Australia—the complaint may have some merit.

The Canadian Vintners Association argues that the tax exemption in Canada took its lead from U.S. policy, but the U.S. program operates through a system of tax credits that merely reduce excise taxes, whereas Canada’s provides an outright exemption.

More important, the exemption treats domestic and foreign product differently.

“If they change their tax rate based on where the grapes come from, that does not sound WTO-consistent to me,” said Robert Hamilton, trade representative for Washington State’s governor. Hamilton undertakes an annual review of agricultural trade barriers, and said giving preferential treatment to domestic products wouldn’t fly in Washington State.

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[There’s] not even a faint glimmer of possibility that we treat Washington grapes differently from foreign grapes,” he said. “It’s blatantly trade-distorting.”

Dan Paszkowski, president of the Canadian Vintners Association, admits that preferential treatment for domestic products is unacceptable under WTO rules, and says this is the nub of the EU’s complaint.

“That is their dispute in principle – that Canadian wine is being taxed differently than imports, and under WTO rules it states that if you have a like product they should be treated the same,” Paszkowski said.

But he feels Canada is being treated unfairly, and wonders if the glut facing producers in Europe is a factor. The situation in Europe is so bad that the EU announced plans last summer to distill 560 million liters of French and Italian wine into industrial-grade alcohol. It has also passed a moratorium on new grape plantings until 2010.

Meanwhile, a growing industry in Canada is eager to put the tax exemption to use.

“The exemption of the excise tax on the bottom line will certainly help us do some of the things we want to do with the building, with the equipment, and also with the vineyard,” said George Heiss, Sr., of Gray Monk Estate Winery just north of Kelowna in British Columbia’s Okanagan Valley. “Any help we can get is appreciated. Taking that away also puts the grower in jeopardy, because if the winery can’t function, they don’t need the grapes.”

Heiss thinks the EU sees Canada as an easy target.

“Canada has always been a weak link when it comes to trade negotiations, we always sort of backed off,” he said. “They wouldn’t pick on the States or Australia.”

But that could change if the current complaint is successful.

Paszkowski said the case could be a trial run prior to similar assaults on the rebate programs in place in the United States and Australia.

“That’s entirely possible,” he said. “There have been other major wine-producing jurisdictions that have put in place similar wine excise tax measures and have never been challenged at the World Trade Organization.”

It will be a while before the outcome of the current complaint is known, however.

Consultations on the tax break took place January 18 at the WTO headquarters in Geneva. The EU is now reviewing the information it gathered during the discussions and must decide if it wants to pursue a full-scale WTO panel review of the measure. Paszkowski doesn’t expect the EU to seek a review before late March.

This isn’t the first trade spat between Canada and Europe over wines.

Through the 1990s, Canada fought for the right to export ice wine to Europe. An agreement to open markets was reached in September 2003, at which time the Canadian Vintners Association heralded the accomplishment as giving Canada’s wine producers “more certain trade rules in the domestic marketplace and a framework for managing any future grievances in a more cooperative manner.”