RED Stripe, a local subsidiary of alcohol beverage giant Diageo, is calling for a level playing field as other alcoholic beverages subjected to lower taxes eat away at its volumes in an already depressed market.

In an attempt to raise additional revenue from alcoholic drinks, adjustments were made to the Special Consumption Tax (SCT) rates in May of last year. Under the new structure, the tax on stout beer (Guinness) rose from 16 per cent to 25 per cent or approximately J$8.97 (US$0.10) per bottle. The tax on Red Stripe, Smirnoff Ice and other beers increased from 21 to 25 per cent, or approximately J$3.59 (US$0.04) per bottle. The tax on the majority of spirits increased from 24 per cent to 25 per cent.

Furthermore, the SCT rates on all beer and spirits below 57.1 per cent alcohol by volume was set at 25 per cent ad valorem. The tax for overproof spirits such as white rum now comes to 30 per cent ad valorem and the specific tax on wines, cordials and liqueurs (US$0.40 per litre) remains unchanged.

Many bar owners are not only reporting a drop in sales but a dramatic change in consumption patterns. There has been a noticeable upsurge in tonic wines and every few months a number of new brands come onto the market. These “wines” , for want of a better word, are immensely popular with young people who have little disposable income but are ardent embracers of the dancehall culture. With the new tax regime making these screw-top concoctions very viable, they pose a clear and present danger to Red Stripe’s brewed manufactured products which carry higher imput costs, employ hundreds of people and entail considerable operational expenses.

“Red Stripe Light now pays 1,000 per cent more tax than an average tonic wine; this inequity has severely impacted us,” Red Stripe’s managing director Al Barnes is reported to have said earlier this year.

Red Stripe is calling for a more equitable approach that sees a tax system based on the alcohol content of beverages. In other words, the higher the alcohol content the more tax it should attract. The company also argues that this introduces a safety aspect and will have more amenable consequences for drink driving and health-related issues.

Speaking with Caribbean Business Report earlier this week, Red Stripe’s head of corporate relations (NorthLAC) Marguerite Cremin said: “The current tax regime gives certain products an unfair advantage over others and makes it difficult for beers brewed right here in Jamaica. Then there is the fact that it negates responsible drinking efforts. Tonic wine is treated as “wine” for tax purposes and therefore pays a much lower rate of tax. This is having a direct and negative impact on the remainder of the industry and is essentially an abuse of a lower tax rate for table wine that was intended to support the tourism industry.”

Red Stripe maintains that “tonic wines” have grown significantly, because of the preferential tax, taking market share away from it. Red Stripe’s Financial Director Allan Hood believes that tonic wines now account for around 35 per cent of the total alcohol category in Jamaica, coming from just five per cent a few years ago. “This category has exploded while beer has contracted .When you look at the net revenue we have lost in terms of taxation, it is in the region of J$2.5 billion. We think the government should base the taxation on alcohol content like they do in many other countries. Now would that make white rum more expensive? Yes, but it you are looking at it per drink it only goes up by J$10. White rum has an alcohol content of 63 per cent. A light beer has a content of only 3.7 per cent, yet we are being charged 10 times that amount. The disparity on taxation is even greater when you compare light beer with tonic wines. It should be tax advantageous for a low alcohol product, not the other way around.”

Many of the tonic wines are manufactured outside of Jamaica. Hard Wine is imported from Trinidad while Power Wine hails from Guyana. Wincarnis has been around for 120 years and is distributed to 14 countries across the Caribbean. It’s manufactured in the UK. Red Stripe these products hurt a locally iconic beer which employs Jamaicans and is a mainstay on the local business landscape.

A look at Red Stripe’s financial results for the nine months ended March 31, 2010 paints a picture of lower production volumes and higher cost of sales resulting in a net profit of J$716 million, a 35 per cent decline on the same period last year. Revenue for the period was J$9.9 billion, marginally higher than for the same period in 2009 and largely driven by a price increase last year as a result of an uptick in the Special Consumption Tax rate.

“This (increase in tax rate) continues to have an adverse impact on our domestic volume performance as a result net sales value is four per cent down on last year, continuing the trend reported at the end of the second quarter,” read a statement to shareholders accompanying Red Stripe’s financial statement.

The company’s total marketing cost was J$1.031 billion and of this sum J$687 million was spent on the domestic market, J$60 million more spent on the J$620 million earmarked in 2009.

Red Stripe continues to see lower volumes and increased raw material prices. Cost of sales for the period under review increased to J$5.4 billion, up from J$5 billion last year.

Specific tax needed

In November of last year, the IMF led a mission to Jamaica to examine its internal tax systems and make recommendations for reform to the government as part of a lending agreement. Consistent with Diageo’s strategic position, the IMF recommended that Jamaica implement a specific tax based on alcohol content. This in effect means that the tax based on alcohol content should be at the same rate per litre of pure alcohol for all beverages.

Red Stripe argues that specific taxes are easier for government and the industry to administer, more predictable and are non-discriminatory. The company also points to the fact that all but two members of the Organisation for Economic Co-operation and Development (OECD) use specific taxes based on alcohol content.

Red Stripe’s finance director Allan Hood, is of the view that ad valorem systems exacerbate price differences, and therefore push quality products beyond the reach of many consumers and encourages them to “trade down” to lower-valued, lower-quality products. He believes that specific taxes protect government revenues because consumers pay the same tax independent of their choice of beverage.

“We are advocating specific taxation which makes the whole process more equitable. That also means that some of our products will be taxed more. The present inequitable system has played some part in our decision to make some workers redundant, and right now is not an easy time to tell people to go home. Right now we are in the eye of a perfect storm,” said Cremin.