Taxation & Economy

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. The Federal Public Service Finance (SPF Finance) figures indicate that excise tax revenue has fallen from €830.7 million in 2016, to €823.2 million in 2017, and €815.5 million in 2018. Due to cross border purchase, Belgium registered important losses in VAT resulting in an overall net loss of 32 million euros for the Belgian exchequer compared with 2015 (more information on studies published on 12 March 2019).

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.