A dram full of tax

Scotch whisky is groaning under the weight of tax from the latest UK duty hike to India's protectionist wall of tariffs and the threat the US will follow suit under Trump. Ron Emler investigates ….   

The vexed subject of tariffs and taxes had been brought into focus before Donald Trump's election as US President.

Last month's UK Budget was universally condemned not only because duty rates are rising by the rate of inflation in February, potentially accelerating hospitality company failures and unemployment, but also because it is widely feared that the increases will act as a disincentive to other countries to lower their alcohol imposts.

"The precedent set by the UK tax system is not helpful when more than 90% of Scotch is exported and other countries can look to the UK – the world's largest and most successful exporter of spirits – as a taxation model," declared Chivas Brothers chairman and CEO, Jean-Etienne Gourgues.

Nuno Telles, the head of Diageo's UK arm, said the increase would push the minimum price of a 70cl bottle of Scotch in England above £12 for the first time. The base price is now £18.20 in Scotland and £14 in Wales thanks to minimum unit pricing.

Mark Kent, CEO of the Scotch Whisky Association (SWA) called the duty rise "a hammer blow", that ran counter to the Prime Minister's commitment to 'back Scotch producers to the hilt'. 

"On the back of the 10.1% duty increase last year, which led to a reduction in revenue for HM Treasury, this tax hike serves no economic purpose," Kent said. "It will damage the Scotch whisky industry, the Scottish economy, and undermines Labour's commitment to promote 'Brand Scotland'.

The UK already imposes the highest taxes on Scotch among the Group of Seven leading economies. Within the European Union only Finland, Sweden and Ireland levy more.

Discriminatory tariff barriers are outlawed by the World Trade Organisation but that global body moves at a glacial pace to address contraventions, most of which are politically triggered. For instance, Peru, has erected tax barriers to protect its national drink, Pisco, from imported competition but to date has faced no effective sanction.

For Scotch, Asia Pacific has become the largest regional market though similar tariff barriers are widespread. Yet they run contrary to the financial evidence that lower import duties and local taxes on spirits generate extra revenues and improve health.

In Vietnam and Thailand, for instance, illicit distilling is estimated to account for half of all spirits consumption. Trade negotiators argue that lowering alcohol taxes would reduce the incentive to produce moonshine as consumers discover reliable, desirable international brands at affordable prices thus increasing revenues as demand for them rises. The threats to health from illicit alcohol fall in proportion.

In the past 18 months Britain has itself provided the evidence that higher taxes are counterproductive. Last year's 10.1% hike triggered a 6.4% fall in sales volumes of all spirits in the first half of this year, costing the UK Exchequer more than £500,000 in revenue compared to the same period in 2023. It is widely predicted that Reeves' duty increase from next February will magnify that effect.

India is the world's largest 'whisky' market, depending on your definition, with Statista predicting that it will grow by 3.58% a year in the next five years making it worth US$20.2bn in 2029. Yet because of the 150% tariff on imports Scotch accounts for just 2% of sales.

The longed-for dream of slashing those tariffs as part of a Free Trade Agreement with India will depend partly on Britain easing its restrictions on student visas and the residence of immediate families, according to Whitehall sources.

The SWA's Mark Kent says: "The UK/India trade talks are a golden opportunity to reach an ambitious tariff reduction in an early harvest deal that could grow Scotch Whisky exports to India by £1 billion over five years. Tackling the tariff and State level regulatory issues would open the market up to smaller producers who are effectively locked out by the substantial barriers to trade.

"Improved market access for Scotch would enable an increasing number of Indian consumers to enjoy our premium product. It would also be good for our industry and Indian government tax revenues – a win-win for all."

But the prospect of global trade liberalisation has receded with the election of Trump. In his campaign for the presidency, he promised to pass a "reciprocal trade act" to protect domestic producers and encourage other countries to buy more American goods.

Trump has already set out a base framework of a minimum 10% tariff on all imports, including Scotch, before individual states of the Union levy their own taxes.

The Tax Foundation, a non-partisan think tank, said Trump's proposed tariff increases would raise US taxes by a further $524 billion annually and shrink employment by 684,000 full-time equivalent jobs. Crucially, it said the estimates did not capture the effects of the additional harms that would stem from starting a global trade war.

The US, where analysts at UBS estimate that 79% of spirits sold there are imported, is by far the most valuable market for Scotch whisky, and the industry already has evidence of how much damage it could suffer during Trump's second term in the White House.

In 2019 he imposed a 25% levy on single malts. That was suspended (not rescinded) by the Biden Administration in June 2021. Over an 18-month period, the SWA says, the industry lost more than £600m in exports to the United States – equivalent to more than £1m a day.

The tariffs related to an ongoing aerospace dispute over subsides between Boeing and the Airbus consortium of which Britain is a member. This has yet to be resolved and Trump will be responsible for the potential reintroduction of the penalty tariff. The five-year suspension is scheduled to end in June 2026. Unless repealed, the tariff will automatically be reimposed.

The SWA fears that the industry could again be collateral damage in a trade war not of its making without concerted action by the US and UK administrations to resolve the underlying dispute. 

The outgoing Biden Administration has shown little movement and Trump is expected to take a similar hard line. Stormy headwinds indeed.