Author: Catherine Mars - Date published: 14 Mar 2008
The abolition of import duties on beer, wine and all alcoholic drinks except spirits is expected to promote the development of Hong Kong as the wine trading and distribution hub for Asia.
The removal of taxes on alcoholic drinks (announced on 27 February 2008) is part of a wider move in which a variety of taxes were slashed in a bid to stimulate investment and retain the territory's economic competitiveness as it posted a record budget surplus of HK$115.6 billion (US$14.8 billion). The tariff abolition follows a round of tax cuts on beer and wine last year which saw the duty on beer and other alcoholic drinks with no more than a 30% alcohol content halved from 40% to 20%, while that on wine was halved from 80% to 40%. To date, spirits have been exempt from tax cuts due to government concerns regarding the impact of spirits consumption on health.
Although Hong Kong is a free port with no tariffs on general imports, duties were imposed on alcoholic drinks products, tobacco, hydrocarbon oil and methyl alcohol. The decision to lower taxes on beer and wine in 2007 and then remove them this year was driven by a number of factors. In addition to strong economic growth and the resultant budget surplus, coordinated lobbying efforts by advocates including consulates, trade and the tourism industry as well as the lack of consumer group objections to the tax reductions implemented last year also prompted the abolition of taxes.
The high level of taxation on alcoholic drinks has been a major obstacle to the country's development as a regional hub for wine trading and distribution. In fact, following the elimination of taxes, further measures, including the removal of administrative controls, are expected in order to facilitate increased import, export and storage of alcoholic beverages in Hong Kong.
Asian wine hub
Growing Asian affluence (the region has the seen the highest growth of GDP measured at purchasing power parity, 10% CAGR between 2002 and 2007) has made the region an important source of growth for the world wine trade. Wine consumption in Asia has risen sharply in recent years (total volume sales were up by 9% between 2005 and 2007, accounting for almost 50% of global volume gains over this period) and the region is forecast to see the most dynamic wine growth over the next five years. It is estimated that 40% of the US$1.3 billion worth of fine wine traded annually in London is already being sold to consumers from Hong Kong and mainland China, signalling a distinct opportunity to shift business to Hong Kong. In fact, following the removal of taxes, Hong Kong is set to become the third wine trading hub globally, after London and New York.
Wine prices in Hong Kong are likely to fall by between 15% and 20% which will give the territory an edge over rivals such as Singapore and Tokyo. Additionally, the territory's proximity to mainland China is advantageous as over time the country will become more and more important as a fine wine market. With its population of 1.3 billion, the expanding Chinese market will be one of the greatest demand forces impacting wine in Hong Kong. Hong Kong now shares many of the attributes that have made London a wine trading hub - low duties, lack of domestic producers and a strong consumer base. London International Vintners Exchange (Liv-ex), the London-based electronic exchange for fine wine, is expected to set up a Hong Kong office to capitalise on the growing market in China. The Hong Kong Trade Development Council is organising the first Hong Kong International Wine Expo which will be held in August 2008, providing a business platform for trade players to exchange and explore opportunities.
Demand set to rise
Trading aside, the tax reforms are likely to benefit demand for wine with prices expected to fall by between 15% and 20%. The developing wine drinking culture in Hong Kong has been fostered by hotels and restaurants which organise wine tasting and appreciation classes to educate consumers. Along with growing consumer sophistication, the tax abolition will encourage consumers to drink more and drink higher quality wines. Consumption of wine (which currently stands at under two litres per capita in Hong Kong) will be boosted, with fine wines expected to see the most significant increase.
The most popular countries of origin for wine imported into Hong Kong are France, Australia, the US, Chile, Spain and Italy (these six countries accounted for 90% of imported volumes last year). Following last year's tax cuts, wine imports reached HK$1.6 billion and 23.5 million litres in 2007, growth of 92% and 27% respectively. Effects of the tax abolition are expected to be even more marked.
Despite the removal of taxes on beer and wine and lobbying by trade organisations including The European Spirits Organisation (CEPS), taxes on spirits have not been reduced and currently stand at 100%. Just as Asia is emerging as an important market for fine wine, the region is becoming an increasingly significant market for international spirits producers, particularly for products like Scotch whisky, although the current high level of tax for the product in the region is a cause for concern among manufacturers.
Catherine Mars, Industry Analyst – Alcoholic Drinks