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Survey: Lowering alcohol excise duties would reverse cross-border trade

Alcohol for sale in Valmiera, Latvia, close to the border with Estonia.
Alcohol for sale in Valmiera, Latvia, close to the border with Estonia. Source: Priit Luts/ERR

Cross-border alcohol trade on the Estonian-Latvian border could be successfully reversed and a positive impact of €100 million effected on Estonia's fiscal receipts by lowering the excise duty rates for beer and strong alcohol in 2020, a survey conducted by KPMG for the Estonian Taxpayers Association (ETA) indicates.

"While the politicians, who initially chose a denial strategy, have admitted their mistake now that a shortfall of several tens of millions of euros in receipts has been revealed, they argue that cross-border trade can not be done away with," ETA chairman Lasse Lehis said in a press release on Thursday. "Since cross-border trade, which was considered impossible at the start, obtained its present dimensions in effectively three months, our question for the experts is — is the movement of tax money to Latvia indeed irreversible or can things be remedied after all?"

According to the analysis by KPMG, the only way to bring the price of alcohol to levels that are competitive with Latvian price levels is by lowering excise duties.

"Lowering excise duties in 2020 to a level where the price difference with Latvia is up to €2 per case of beer and less than €1 per 0.5-liter bottle of vodka would create the prerequisites for reversing cross-border trade and thereby increasing fiscal intake," Hanno Lindpere, head of advisory services at KPMG Baltics, said.

He said that according to their model estimate, this would increase the inflow of alcohol excise duty into the Estonian state budget by approximately €69 million and VAT intake by €32 million.

According to a poll taken by Kantar Emor in which 511 people were interviewed upon exit from alcohol stores in Valka and Ainaži on the Latvian side of the border, almost four in five of them had bought beer and 45-46% vodka or some other strong alcoholic beverage either alone or together with beer, Lindpere said.

Most of the respondents, or 90%, said they would stop traveling to Latvia to buy alcohol if the price difference with Estonia was €1-2 per case of beer and bottle of strong alcohol, he added.

It has also been established that Estonian retail chains and local chain stores would be prepared to apply a lower markup to the most popular kinds of alcohol, approximately 5%, if the combined result togther with lower taxes was the return of buying to Estonia.

According to Lehis, the analysis by KPMG indicates that just like the tax decisions made by the state were able to direct residents to Latvia to buy alcohol there, the mistake can be corrected by bringing duties to a reasonable level.

"While on one hand the people of Estonia would no longer have motivation to travel to the southern border for shopping, our northern neighbours would return to make purchases here, which would mean an additional €100 million flowing in in tax revenue," the ETA chairman said, referring to Finnish tourists.


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Editor: Aili Vahtla

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