Vodka-fueled Spat Over Tax Reform Straining Israel-Ukraine Ties

Tax Authority submitted plan to Knesset to increase import duties on imported alcohol, much to the Ukraine's dismay.

It's no Purim spiel. An upcoming alcohol tax reform could turn into a diplomatic crisis with Ukraine, after the Tax Authority submitted a plan to the Knesset to increase import duties on imported alcohol, much to the Eastern European vodka-producing country's dismay.

The plan affects alcohol imported from countries with which Israel does not have trade agreements, from 2012. It is intended as compensation for Israel's alcohol producers, which will be harmed by the planned tax increase on cheap alcohol. The reform, which received the approval of the Knesset Finance Committee on Wednesday, will mainly make vodka, local producers' specialty, more expensive.

Israel imports significant quantities of cheap and mid-range vodka from Ukraine. The current import tax on Ukrainian liquor is NIS 1.50 to NIS 2.50 per bottle. The proposal would make it NIS 4.50.

The Ukrainian Embassy voiced strong opposition to the plan, and met with officials from the Foreign Ministry, Industry and Trade Ministry and tax authority.

After these bodies refused to change the plan, Ukrainian officials turned to Knesset members from Yisrael Beiteinu, which enjoys wide support among Israel's Russian-speaking population. The MKs took the Ukranians' side.

"When you look at the reform, you see that it's going to destroy local production as well as imports from countries that don't have trade agreements with Israel, such as Russia and Ukraine," said MK Alex Miller (Yisrael Beiteinu).

The Manufacturers Association of Israel backed the plan, however, stating that it strikes a balance between the local producers and importers. But it warned that the plan to keep increasing alcohol taxes in the future would eventually lead to closed plants and layoffs.

The reform, which comes amid international pressure on Israel to make its taxation match internationally accepted levels, is intended to make alcohol more expensive depressing consumption. There are two stages to the reform.

The first will go into effect on March 3, postponed after the Knesset Finance Committee decided yesterday to extend the current taxation scheme by a week, and demanded the Finance Ministry rework the new taxation plan.

Under the new plan, the tax per liter of pure alcohol will increase to NIS 20, up from NIS 15 - meaning if a 1-liter bottle contains 12% alcohol, it will be taxed at NIS 20 multiplied by 0.12, instead of NIS 15 multiplied by 0.12. The percentage tax on the sales price will change as well. The current level is 50%. In addition, imported drinks will be taxed at 150% of the bottle price.

This means that a bottle of vodka that costs NIS 17.50 to NIS 20 this week will cost NIS 27 or NIS 28 next weekend, while a bottle that currently costs NIS 27 to NIS 30 will be NIS 30 to NIS 31. Vodka currently costing NIS 60 to NIS 65 will become NIS 70 to NIS 72.

This scheme will be in effect for two months, while the Finance Committee decides on its future.

The next stage will be in 2014, at which point there will be a sharp increase in the tax per liter of pure alcohol - from NIS 20 to NIS 80.

In addition, the percentage tax on the sales price will be canceled, meaning that alcohol will be taxed only based on the volume of the bottle. This reform will not be applied to wine or beer, however. This stage is expected to make 92% of the alcohol consumed in Israel more expensive, mainly cheap drinks. Higher-end liquors will become cheaper as a result.

The current tax scheme represents a victory for the Israel Airports Authority and the James Richardson duty-free shops. They are expected to be hurt by the reform, since they profit from the massive tax on expensive liquors - and the reform will reduce the tax on these drinks. The current formulation of the reform changes tax levels less sharply than another plan that had been discussed.

Over the past several weeks, James Richardson had been pressuring members of the Finance Committee through the lobbyists Aliza Goren and Tomer Amir; the Israel Airports Authority had hired Ronit Eckstein, its media advisor. Goren and Amir also lobby for Haaretz. They said 30% of the duty-free shop's income is from alcohol.

Finance Committee Chairman Moshe Gafni (United Torah Judaism) said import authority director general Kobi Mor had argued that the plan would severely impact the duty free shop's revenue, while encouraging the public to purchase more expensive alcohol inside Israel, as opposed to from the duty-free shop.

"Beyond that, the fact that expensive alcohol will become cheaper will heavily impact consumption, and the committee cannot legitimize that," Gafni said. He also complained that OECD representatives had sent him a letter bearing the signatures of the U.S., British, French, Irish and Finnish ambassadors, to express support for the plan to raise taxes on alcohol manufactured in Israel. "This is a precedent - foreign ambassadors intervening in internal matters," he said.