High tax, incentive for illicit alcohol

Illicit trade in alcohol seriously damaged the legitimate sector, reducing its ability to grow, invest and employ; and it also depresses the tax revenues that national exchequers could normally expect to receive.  That cost is significant: an EUIPO study in 2016 found that intellectual property infringements in the EU spirits sector reduced sales by around €740 million, or 4.4% of total revenue.  In addition, the consumption of illegal production (such as moonshine, counterfeit, smuggling, surrogate alcohol, etc.) poses a serious health threat as consumers can be faced with inferior or even toxic products (e.g. over 50 people died and dozens more suffered serious illness in the Czech Republic, the Slovak Republic and Poland after drinking illicit spirits tainted with methanol in 2012). 

We believe the scale of the illicit markets is directly linked to excessive increases in tax on legitimate products

Examples of the effect of high tax:

  • Greece holds the 6th highest place amongst ΕU-28 countries in absolute rates.  The excise duty rate on spirits rose by 125% amidst the crisis with 4 consecutive increases since 2009.  This fuelled smuggling, strengthened the black economy and increased tax evasion. Legal spirits sales have fallen by nearly half in six years, because a significant part of consumers have switched to products with lower or no taxation.  As a result, despite the massive increase in rates, State revenues of €289 million in 2009 had fallen to €272million in 2015.
  • Romania is another example.  In September 2013, excise tax was increased by 40%; this had serious consequences and resulted in a 32% decline of the legal taxed market and a revenue loss of about €2 million for the state budget in 2014. The increase not only damaged the legitimate sector without generating additional revenues for the State, and every week there were reports of alcohol poisoning due to the consumption of surrogate/denatured alcohol.  As a consequence of all the problems, the Romanian Government decided to lower the excise rate on spirits by 30% from 1 January 2016.
  • The UK stopped the excise duty escalator and in 2015 decided to decrease by 2% the rate on spirits with visible positive outcomes in terms of jobs, sales, and state revenues.
  • Belgium is another very bad case. The 40% increase of excise tax on spirits in November 2015 has had devastating effects as predicted by the industry.  Losses in sales, jobs, in investments due to cross border purchases.  In 2016, the Belgian Ministry of Finance was expecting an extra €220m in excise revenues but the reality is very different.  At the end of the first year: only an extra €51 million was collected instead of the €220m expected.  Moreover, because of increased cross border shopping, Belgium lost €73 million in VAT.  This means a net loss of €22 million to the Belgian exchequer compared with 2015.

We call on other countries having gone through massive tax increases over the last few years to decrease excise tax and follow the example.  

By its very nature, however, the scale of illicit alcohol is difficult to quantify.  And yet, a better understanding of the problem would allow the right policy tools to be developed, thereby helping ensure consumers only buy authentic spirits, and thus save lives, improve government revenues and help genuine traders. 

There are a number of studies and initiatives that have attempted to quantify the scale and value of illicit alcohol but these are not yet systematic and cannot usefully be compared.

IARD toolkit for assessing unrecorded alcohol market

Published in Janaury 2016, the Toolkit has three key aims:

  • to serve as a resource for those interested in gaining a better understanding of the issue of unrecorded alcohol;
  • to provide a menu of approaches that can be used to investigate the unrecorded alcohol market, depending on the research question, context, and existing data and resources available; and
  • to provide a road map for achieving, to the greatest extent possible, consistency and uniformity across studies so that results can be compared in a sound manner.

OECD - Report on “Illicit Trade: Converging Criminal Networks”

Published in April 2016, the first OECD Report contains base line estimates of the monetary value of illicit trade in several of the most important sectors, including alcohol.  The objective is to facilitate a cross-cutting and holistic effort to improve data quality, enhance partnerships between the public and private sectors for data sharing, and conceive new approaches to effective strategies.

“Until now, the percentage of illegal alcohol is estimated by WHO at around 30% across the world and the cost can be counted in billions”, said Paul Skehan (Director General of spiritsEUROPE), adding “However, the level of knowledge remains quite poor.  We see the OECD report as a great contribution to the debate but more is needed for systematic and comparable research to measure the scale & value of illicit alcohol in Europe”.

OECD & EUIPO - Trade in Counterfeit and Pirated Goods: Mapping the Economic Impact

Published in April 2016, the OECD- EUIPO Report shows that imports of counterfeit and pirated goods are worth nearly half a trillion dollars a year, or around 2.5% of global imports.

  • The total value of imported fake goods worldwide was USD 461 billion in 2013 (total imports in world trade of USD 17.9 trillion).
  • Up to 5% of goods imported into the European Union are fakes.
  • US, Italian and French brands are the hardest hit.
  • In many cases, the proceeds of counterfeit trade go towards organised crime.
  • Most fake goods originate in middle income or emerging countries, with China the top producer.
  • Postal parcels are the top method of shipping bogus goods, accounting for 62% of seizures over 2011 and 2013

EUIPO -  The economic cost of IPR infringement in spirits & wine

The EUIPO study published in July 2016 shows the following trends:

  • 3.3% of sales lost by the sector due to counterfeiting (4.4% of spirit sales and 2.3% of wine sales)
  • €1.3 billion of revenue lost annually by the sector
  • €1.7 billion of sales lost in related sectors
  • 4,800 direct jobs lost.
  • 23,300 direct and indirect jobs lost in the EU economy of which 8,600 jobs are lost in agriculture and 6,100 jobs are lost in the food industry.
  • €1.2 billion of government revenues are lost (taxes, social contributions and excise duties).