Association: will Latvia step on Estonia’s excise tax rake?

Rapid and economically unjustified increase of the excise tax has cut a big hole in Estonia’s budget, according to Latvian Alcohol Industry Association. Because strong alcoholic drinks cost less in Latvia, Estonians regularly travel to Latvian to buy cheaper alcohol, says the association’s CEO Dāvis Vītols.

Estimates from Latvian Alcohol Industry Association show that Estonians’ alcohol trips to Latvia had brought he country’s budget at least EUR 40 million. «Estonia’s example proved that unjustified excise tax increase does not guarantee tax revenue for the state budget. What it does is exactly the opposite of the desired effect: buyers turn to cheaper alcohol offers in neighbouring countries and the illegal alcohol market. Last year, Estonia’s budget received EUR 50 million less than it was planned. Revenue from alcohol trade alone had declined by approximately EUR 30 million. Compared to a year before, the volume of legally sold high-grade alcohol in Estonia has declined 33%, which created massive losses for Estonia’s budget and alcohol production sectors of neighbouring countries,» says Vītols.
 

According to him, Latvia also plans to raise excise tax rate in the next three years: by 15% this year, 10% next year and 10% more in 2020. «Tax increase is planned in spite of the fact that excise tax and VAT together for 70% of the price of high-grade alcohol, sometimes close to 90% of the price. Now we are about to follow Estonia’s tax policy, which turned out rather badly for them. Latvia had stepped on this kind of tax rate once before – in 2009, when excise tax on alcohol was increased by 41%. After this increase, revenue from sales of high-grade alcohol declined by approximately EUR 20 million. Legal alcohol trade had declined 45% that year. Together with uncollected VAT and other taxes, Latvia’s budget lost approximately EUR 100 million. Everything points that Latvia has forgotten about 2009 and Estonia’s experience,» says Vītols.
 

«Latvian politicians have to analyse this data and think hard on the dynamics of raising excise tax. As we had previously stated – there is no real correlation between increased tax and budget revenue. The current plan to raise excise tax for alcohol means Latvia has learned nothing from 2009 and Estonia’s experience,» admits the association’s CEO.
 

Last year, Estonian Institute for Economic Research performed a large-scale study of residents’ alcohol tourism tendencies. The number of territories in Latvia to which Estonians travel to get cheaper alcohol has been increasing in recent years. 35% of respondents in Estonia said they had bought alcohol in Latvia last year (21% in 2016). 18% of them admitted travelling to Latvia specifically in order to buy alcohol. 64% of respondents said they know at least one person who had travelled to Latvia to buy alcohol there in 2017 (43% in 2016), the association reports.
 

«In recent years there has also been an increase of alcoholic beverages Estonians purchase at once in Latvia’s stores. This also means an increase of the amount of money they spend on a single shopping spree. Estonian Border Guard report plans to control Latvian-Estonian border more strictly to combat attempts to carry more alcohol than it is allowed over the border. A single person is allowed to carry 10 l of high-grade alcohol, 20 l of intermediate products (up to 22° C), 90 l of wine or other fermented beverages (sparkling wine is one exception – 60 l), as well as 110 l of beer to their home country from another EU member state,» as noted by Latvian Alcohol Industry Association.
 

Vītols says that if excise tax in Latvia is increased considerably in accordance with the current plan, the illegal alcohol market may grow even more as a result. Instead of going to Latvia, people will start travelling to Poland or Germany to purchase alcohol, leaving Latvia without revenue from excise and other taxes.

BNN

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