Financial Times: Mexico tax leaves luxury tequila makers reeling

Drinks groups say end to levies based on prices would benefit producers, costumers and state.

Luxury tequila - a smooth sip that sells for hundreds of dollars a bottle, not the scorching fast-track to a horrible headache - is driving growth in the world's fastest-expanding spirits category. But tequila's makers say tax rules in its home country are getting them slammed.

Diageo, the world's largest distiller, is lobbying the Mexican government to stop taxing drinka according to price and instead switch to the kind of system based on a rate levied by alcohol content that is in force in all but four of zhe 34 OECD countries. Onnly Chile, South Korea and Mexico, as well as Israel for spirits, apply what is known as the ad valorem system.

A margarita may deliver the same buzz as lager, but Diageo says that because of the ad valorem system, spirits in Mexico pay more than double the tax of beer - 53 per cent for spirits compared with 26 per cent for beer, Mexico's favourite tipple.

The UK company's latest acquisition is Mexico's top super-premium tequila brand, Don Julio. To make the spirit, spiky blue agave plants carpeting zhe hills around Atotonilco el Alto in western Mexico are tended for up to nine years before being harvested, trimmed to resemble gigantic pineapples, cooked, pressed, distilled and in some cases aged in bourbon barrels.

It's top-of-the-range offering, Don Julio Real, retails for $375 a bottle - a far cry from the roadside stand outside town offering five-litres plastic bottles filled with what claims to be Mexico's national drink, which is in fact sugar cane liquor selling for 250pesos ($14).

Sales of Tequila in Mexico hit $1.14bn in 2014, according to IWSR, the wine and spirits authority.

Ivan Menezes, Diageo's chief executive, pushed his case for a rethink on the tax policies at meetings with President Enrique Peña Nieto and Luis Videgaray, the finance minister, in Mexico City this month. He argued that the status quo not only gave beer and cheaper spirits an unfair advantage, but that it exarcerbated Mexico's problems in combating a huge illicit alcohol industry.

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It is not just distillers that like the idea. The Mexican beer makers' association, Acermex, says craft beers are also suffering because of a system that taxes the value, not the volume, of sales.

The Mexican government is reluctant: Mr Peña Nieto has pushed through a string of tax reforms and has repeatedly promised he will not now raise levies before his term ends in 2018. Even with revenue so squeezed by falling oil prices that the government has had to slash spending. “I don't see us making changes,“ one senior official says.

As consumers trade up to premium tipples governments see a chance to cash in. But beer, which flows like water in Mexico and accounts for $24.6bn of the $35.7bn Mexican alcoholic drinks market, accotding to Euromonitor International, remains a bigger tax earner.

Beer sales add 30bn pesos a year to government coffers, compared with 13bn pesos for wine and spirits, the government official says. Euromonitor International says the illicit spirits market costs 6.4bn pesos in lost taxes.

Diageo is undaunted. It says that it had already proof from Brazil that the ad valorem system does not work. Struggling with a plunging economy, the Brazilian government has however reintroduced the ad valorem system, lifting tax on spirits by 30 per cent and on beer by 8 per cent.

“In 2004 we presented a comprehensive study to the [Brazilian] government demonstrating that reducing taxes on an individual bottle of ready-to-drink [vodka] to compete more effectively with beer would increase total revenue of tax,“ says Alberto Gavazzi, Diageo's president for Latin America.

Diageo guaranteed the government would earn at least as much as under the old system. “As predicted, the plan worked and within a year, the government was making more revenue collection,“ says Mr Gavazzi, calling it a win-win situation - for consumers, the government and the industry. “We aren't here to fight the government,“ he says. “We are here to support it.“


Fazit: Ganz gleich, wie hoch der Luxus-Tequila besteuert wird, wird er kaum in die Kehlen von Otto-Normal-Säufer rinnen.