Wednesday, 5 December 2007

Drinking for your country - whiskey and tax

If you live in Ireland and you feel a hand in your pocket on Wednesday, that would be Brian Cowen, our finance minister, paying for his recent 15.6% pay rise.

Yup, it's Budget Day. We have been warned that the purse strings must be tightened because the economy is running out of steam. Whiskey drinkers have even more cause to worry since the Health Service Executive recently called for a 10% rise in alcohol duties to curb excessive consumption.

In fact, Ireland is already one of the most expensive places in the world to buy a bottle of whiskey. An Irish Times survey earlier in the year discovered that a standard 70cl bottle of Jameson costing between €24 and €29 in Ireland would only set you back €12 in Spain, €14 in the US, €15 in England and €16 in France.

A large part of the explanation is tax. There are two kinds of tax on alcohol: duty and VAT (Value Added Tax, similar to sales tax in other countries).

Duty is based on the alcohol content alone. VAT is based on price. As if to mock us, duty is added first then VAT is calculated on the duty-inclusive price. So we are paying tax on tax.

For whiskey, duty is €39.25 per litre of alcohol. Note, not per litre of whiskey. So for a litre of whiskey containg 40% alcohol by volume (ABV), the duty payable is 40% x €39.25 = €15.70.

This is one reason, incidentally, that supermarket whiskey brands are always 40% ABV. Any higher and more duty would be payable. Any lower and it would not legally be whiskey.

VAT is 21% for whiskey. It's calculated on the retail price (ex-VAT) including duty.

Let's work an actual example. If a 70cl bottle of Jameson (40% ABV) costs you €26, how much are you donating to the Exchequer?

€26 includes 21% VAT so the amount of VAT is €4.51. The duty is 40% x 0.7l x €39.25 which is €10.99.

So total taxes are €4.51 + €10.99 = €15.50. As a percentage of the final price paid, that's 59.6%. So let's say 60% of the price you pay goes to the government. For a more expensive whiskey the percentage will drop (since duty remains constant as long the alcohol content is the same).

It's no wonder we have managed to crush what was once a strong indigenous industry. For comparison, the VAT rate in the UK is 17.5% and excise duty is €27.26 (£19.56) per litre of alcohol. That's substantially less than applies in Ireland, yet the Scotch Whisky Association, representing the whisky trade in Scotland, still regards this level of duty as "punitive and discriminatory".

Update Wednesday, Dec 5: We dodged a bullet. Alcohol duty was left unchanged. But the Minister warns us that he may not be so lenient next year:
It has also been suggested to me that there might be public health benefits arising from a switch to lower alcohol beverages. This will require some study, and indeed some adjustments by industry – I am giving notice now that I intend to bring forward measures in this area in my next Budget.