A Taxing Dilemma: Rice Wine in the WTO Era

Based on WTO rules, rice wine, as a distilled alcohol, is considered a "hard liquor" in the same category as things like brandy and whisky. Therefore it is only natural that it be taxed at Taiwan's standard rate for this category-NT$185 per liter. Taxes on rice wine have been ratcheted up each year over the "transitional" period since 1998. Five years ago a 600 ml bottle of ordinary "red label" rice wine cost NT$24; this year the price is expected to hit NT$185, of which NT$110 is tax.

But for the people of Taiwan, rice wine is not a drinking liquor, but an everyday and indispensable cooking ingredient, a component of dietary supplements for pregnant women, and the piece de resistance in warming wintertime tonic foods. Knowing that the price would rise, people began to hoard rice wine, leading to all kinds of bizarre behavior. This formerly most commonplace of products became a scarce commodity, hoarded for profit.

Everybody buy rice wine!

By 1999, hoarding of rice wine had become so severe that the Taiwan Tobacco and Wine Monopoly Bureau (TTWMB) was unable to keep up with demand, and was forced to impose a two-bottle-per-customer limit on purchases. In those days, rice wine sold out within minutes after arriving at retail outlets, and rushing out to buy it became a widespread form of "morning exercise." Thereafter other measures were introduced, such as requiring people to turn in an empty rice wine bottle for each new bottle purchased, and making people carry their household registration certificates (to verify the number of family members) to determine how much rice wine they could buy.

Despite the fact that the TTWMB continually increased production, it was still a challenge to find a bottle for sale. Novelties like "a free bottle of rice wine with each tank of gas" and "a free bottle of rice wine for each visit to our beauty parlor" popped up. As one housewife, who grew too apprehensive over bootleg wine to cook shaojiuji, wondered: "How come life just gets more and more inconvenient since we entered the WTO?"

At the end of last October, there were several incidents of poisoning in aboriginal villages in Ilan County resulting from consumption of bootleg rice wine, shining the public spotlight on the longstanding problem of illegal private distilling. Department of Health statistics indicate that as of December 2002, there were 11 confirmed cases of methanol poisoning. With the full mobilization of the police, enormous amounts of bootleg wine have been confiscated in both rural and urban areas.

After the incidents, people began to blanch at the mention of rice wine, and the successor to the TTWMB, the Taiwan Tobacco and Wine Company, got together with the Department of Health to offer free testing of rice wine for citizens at test stations around the island. They discovered some bootleg rice wine with methanol content up to 97,000 parts per million (PPM), with the norm being around 1000 PPM. One sip of stuff like that could kill a person.

To deter the spread of bootleg rice wine, at the end of 2002 the Executive Yuan proposed emergency amendments to the law governing tobacco and alcohol, increasing the penalty for illegal production of alcohol from a maximum of one year in prison to a maximum of three years, with a fine of up to NT$3 million.

Death by rice wine

Of course the rice wine incidents cannot be entirely ascribed to WTO entry, and there is a clear need for better management and guidance in the process of legalizing private distilling in Taiwan. Nonetheless, now that the issue of the rising price of rice wine has been crystallized for society in fatalities, it seems that economics alone cannot set the standard for taxes on rice wine, but that cultural needs also must be taken into account. As one retired TTWMB employee points out: "The types of alcohol and the culture of their uses are completely different in the East and the West. Why should rice wine for be equated with hard drinking liquor? The category is based on Western types of alcohol, but we've been shoehorned into it!"

Given the severity of the poisoning incidents, the Ministry of Finance has made an emergency proposal to lower the tax on rice wine, altering it from a "volume-based tax" to a "price-based tax." At the same time action has been taken to ask that the US and EU agree to reopen discussions on the rice wine tax rate. If negotiations are successful, it is estimated that standard Daoxiang rice wine (formerly "red label") will fall from its current price of NT$130 per bottle to NT$50.

However, according to the 1998 agreement signed by Taiwan on tax rates for distilled liquor, alcohol and tobacco tax rates cannot be altered for 30 months from the date of WTO entry. If the government moves to lower the tax rate on rice wine in violation of the agreement, the US and EU could file a complaint before the WTO arbitration board. If Taiwan loses, it would have to rectify its policy; if it failed to do so signatory countries to the wine and tobacco tax agreement (mainly the US and EU) could then impose anti-dumping duties on similar items from Taiwan or take other compensatory measures which would be equally onerous from Taiwan's point of view.

In fact, Japan has been in a position similar to that of Taiwan. As early as the days of GATT (predecessor to the WTO), other countries accused Japan of suppressing tax rates on sake to protect its domestic industry. Japan lost the case, but simply refused to comply with the ruling. Under the WTO regime, Japan again lost in arbitration over complaints brought by foreign countries. WTO rulings are more enforceable, so within 15 months of the ruling Japan raised taxes on sake and somewhat lowered tariffs on imports of hard liquor. Nonetheless, by hemming and hawing, Japan put off raising taxes on sake for more than a decade.

Self-defense

Amidst the concurrence of rising rice wine prices, initial licensing of private distilling operations, and bootleg poisonings, sales of standard rice wine-the former "red label," now Daoxiang 40 proof (i.e. 20% alcohol content)-fell from 25 million dozen bottles two years ago to 400,000 last year. Besides competition from legal privately manufactured rice wine and unlicensed private distillers, another factor was the appearance of numerous "rice wine substitution" strategies among the public.

You can buy a small home still for less than NT$3000, and it is claimed that you can make one liter of rice wine in only three hours. There are also rice wine purifiers, which can filter the salt out of salt-added Daoxiang cooking wine to make what is essentially ordinary 40 proof rice wine. Overnight, books and courses on home distilling have hit the market in droves.

Moreover, the Taiwan Sugar Corporation, which already had a license to make alcohol, has very creatively come out with "DIY sweet rice wine." It divides the wine up into three parts: cane spirit (ethanol made from sugar cane mash) with a very high alcohol content, rice wine, and water. Given that one liter of cane spirit is taxed at only NT$7 per liter, once mixed this product works out at equivalent to a mere NT$85 per 600 ml bottle. Everywhere else in the world distilleries mix their alcohol before retailing it, but Taiwan is the first to come up with a completely unique "DIY" brew, which should give you some indication of just how important affordable rice wine is to the people of Taiwan.

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Incidents of fatal poisonings from bootleg liquor created a ruckus, and many organizations rushed to offer advice and facilities for citizens to test their rice wine for safety. (photo by Hsueh Chi-kuang)

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Consumers are not at all happy about WTO rules that require rice wine, at 20 proof, to be taxed as a "hard liquor." The photo shows a protest against rice-wine price hikes, held at the American Institute in Taiwan; the US was Taiwan's main counterpart in negotiating WTO alcohol tax conditions. (courtesy of New Era Youth)