Sunday, May 5, 2013

Anyone up for a Fight...?

OK, I have to get this out of my system….
I have had a pile of paper sitting on the ground by my desk for the past few months. Since December 2012 actually, dating back to a flurry of post-budget activity when the Irish wine trade was walloped over the head by the huge increase in Excise Duty.
I’m wary of raising the whole “whining” issue again and to be honest I couldn’t care less about the repetitive arguments as to whether or not an affluent middle class person can or cannot afford to do without a bottle of wine now. Nor is it about the vague excuse of tackling alcohol abuse that was given as justification for the rise – that was a smokescreen, and our dangerous relationship with alcohol excesses of all forms will not be solved by simple tax increases. Nor is it a rant about the continuing failure to legislate to ban below cost selling of alcohol – alcohol abuse, hello?
This is purely about the Excise treatment of Wine, relative to other forms of alcohol. And it’s very interesting – and surprising. It’s also long – but please persevere…..
We all know that Minister Noonan stated that the Excise increases on alcohol in the last budget would bring in a projected additional €180 million in tax revenues in 2013. But wine took the biggest hit, so how much would it be expected to contribute to that €180 million target?
There’s a Unit within the Department of Finance called the Tax Policy Unit that produces, among other things, a “briefing” document each year on General Excise Duties in advance of the Budget. It may have been abolished, since I can’t find the document for December 2012’s budget. But since Excise rates didn’t increase in December 2011, it can be taken that the assumptions were the same for 2012. The document simulated a number of possible Excise increases and the benefit in terms of additional taxation revenue, including 10 cents on a Pint of Beer and €1.00 on a bottle of wine. Fast forward a year and, hey presto, Minister Noonan acted on the scenarios and we can see that his €180 million will come from:
10 cents on beer brings €73 million
10 cents on cider brings €10.2 million
10 cents on spirits brings €38.2 million
€1.00 on a bottle of wine brings €65.48 million
We’ll come back to these figures and their projected impact on the market later….I believe they will come back to haunt Minister Noonan
You can read the whole document here: Tax Policy Unit
There are a couple of other really interesting things in it. Firstly – and this really surprised me – on page 10, there’s a section called “Cost of Alignment of Irish Excise with UK Rates”. Bear in mind this was before either Irish or UK Excise changed, i.e. pre-December 2012. The figures show that Minister Noonan would have achieved a GAIN of €92 million by bringing our Excise into line with the North. That’s over 50% of what he was looking for.

Why did he not do this? Well, my guess is because it would have involved increasing Excise on beer by a greater amount – and we all know that wine is just consumed by middle-class yuppies who can take the hit. Oh yeah, and there’s a pretty strong beer lobby, and one or two pub-owning politicians. Any TD’s that own wine shops? Thought not.
But away from gross generalisations about class (not that our Minister would make such a mistake of course), there’s an even more interesting nugget. Page 11 deals with the normally mind-numbing topic of “Issues at EU Level”….
42: “The EU Commission challenged Ireland some years ago about what it considered an unacceptably favourable treatment of beer (a largely domestic product) as opposed to wine (a largely imported product).”
43: “The Commission has been unsuccessful in an ECJ case against Sweden on this issue and the matter has not been pursued with Ireland. Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
No, that’s not my keyboard going wonky – that’s the bit that the Department of Finance don’t want any of us to read about the why, how, what and when of the whole little nasty business of some EU heavies putting pressure on Ireland about Excise rates on Wine. What could be in there that is deemed unsuitable for us to see?

So I went looking on the Internet…..
Firstly, here’s the Summary Judgement of April 8th 2008 in relation to the case the European Court of Justice took against Sweden for this alleged discrimination against wine in favour of beer.
The ECJ lost. But why? And why are the Irish officials so worried?

Here’s the full judgement: European Court of Justice Full Judgement

As with everything that people don’t want you to see – it could have some very interesting ramifications in light of the recent increases in Ireland. But back to 2008 first – why were the EJC unsuccessful in their action against Sweden? The court decided that:
A national taxation system which taxes wine, which is mainly imported from other Member States, more heavily than beer, which is mainly a domestic product, and which is based on the taxation of the percentage of alcohol by volume of the wine and the beer, does not appear to have the effect of affording indirect protection to national beer and therefore is not incompatible with the second paragraph of Article 95 of the Treaty (now, after amendment, the second paragraph of Article 90 EC) since, on the one hand, the difference between the price of strong beer and the price of wine in the intermediate category, in competition with that beer, is such that the difference in the tax treatment of those two products is not liable to influence consumer behavior in the sector concerned and, on the other, it is not shown by the statistical information regarding sales of the products in question that there is an actual protective effect.
I recommend you read the full document – it’s fascinating – but at the end of the day, it seems to boil down to two things:
a) Increases in Excise on Wine didn’t seem to encourage people to switch to beer
b) Sales of wine apparently didn’t suffer
But that’s a big simplification – you need to read the document as there are fascinating parts that are unique to the Swedish market that would/could be interpreted totally differently in the context of the Irish market.
So before we all become middle-class wine drinking yuppies who are also amateur lawyers, let’s get a few facts regarding the Irish situation out of the way:
Historical Excise treatment – prior to December 2012:
  • Excise on Beer remained the same from 1994 to 2010, when it decreased by about 20%
  • Excise Duty on Wine was increased by 50 cents a bottle in October 2008, but was then reduced by 20% in 2010.

Excise Receipts – from 2001 to 2010:
  • Excise receipts to the Exchequer from beer fell by 27.4%
  • Excise receipts to the Exchequer from Wine increased by 95.2% over the same 10 year period
Consumption – from 1994 to 2011:
  • Consumption of beer is some 20,000,000 litres annually, much the same as it was in 1994 – but it rose and subsequently fell in the intervening period.
  • Consumption of Wine has increased from about 51,000,000 litres per annum in 1994 to 87,000,000 litres annually.
Relative Taxation:
So much for “pure” headline figures. What about how the Government taxes the two alcohol products in a relative way – how much does the Government get per litre, per % of alcohol?
Pre-Budget December 2012
  • Still Wine Excise brought in €0.2098 per litre, per % of alcohol (12.5%)
  • Beer Excise brought in €0.1571 per litre, per % of alcohol (4.2%)
So wine was proportionally considerably higher, with 5.27 cents difference between the two
Post-Budget December 2012
  • Still Wine Excise now brings in €0.2965 per litre, per % of alcohol (12.5%)
  • Beer Excise now brings in €0.1913 per litre, per % of alcohol (4.2%)
So wine is again higher, and the gap has grown to 10.52 cents difference between the two since the Budget. That’s a 100% increase in the gap.
Evolution of Real Values - % of retail value:
This is the nub of the issue – it all comes down to what the consumer pays at the end of the day, and the tax treatment of that price.
Pre-Budget December 2012:
  • The Excise on Beer accounted for 9.4% of the total price to the consumer
  • The Excise on Wine accounted for 21.3% of the total price to the consumer
Post-Budget December 2012:
  • The Excise on Beer now accounts for 10.9% of the total price to the consumer
  • The Excise on Wine now accounts for 27.8% of the total price to the consumer – a proportionally much greater increase.
So the Department of Finance and Minister Noonan may have been comfortable running the risk of European Court of Justice ire in the past – and happily blanking out bits of interesting information from public documents, but the question is have they now distorted the relationship between the excise on Beer and Wine enough to warrant some interest from the ECJ?

A couple of thoughts spring to mind, that might be of interest to the ECJ:

a)      The Government had the opportunity to equalise Excise rates with the North and GAIN €93 million, but it would have involved raising Excise on beer. Instead they chose to favour/protect beer and increase Excise on wine instead.

b)      If wine sales fall due to the Excise increase, and beer remains steady, it would seem to me that it could be shown that the Government imposed an unfair increase on Wine relative to Beer.

One final thought. You might think that the Government are crazy thinking they are going to get that extra €65.8 million from the increase in Wine Excise – after all, all of us middle-class wine drinking yuppies are pretty strapped at the moment.

Well, they know that already. In 2011 they got €230 million in Excise revenue from about 87 million litres of wine sold.

In 2013, to get their €298 million, they only need us to sell 80 million litres of the stuff – that’s a 10% reduction in sales planned for your, mine and everyone’s wines sales this year, courtesy of the Government.

Market distortion? Unfair discrimination?

You decide…