Breakthrough for Scotch in Hungary

13 Jun 2014

The European Court has ruled that tax preferences for Hungarian spirits made from fruit, known as palinka, are illegal. This breakthrough is the culmination of a four year campaign to remove discrimination against Scotch Whisky.  Once whisky and palinka are again taxed at the same rate, we hope Scotch Whisky can recover sales lost in recent years to Hungarian producers who enjoyed illegal tax advantages. 

When Hungary joined the European Union in 2004, certain spirits were granted tax preferences. These were designed to protect the rural tradition of households being allowed to take their surplus fruit to the local distillery and, upon payment of a nominal rate of excise tax, receive the equivalent amount of palinka, Hungary's national spirit. The Scotch Whisky Association and colleagues from other Member States registered concerns that the quantities involved were well above what was needed to help 'small' distilleries. The Commission agreed to a review, but not until 2015. 

The tax preference was poorly enforced.  Although it was meant to cover palinka for personal consumption only, there were regular reports of the spirit being sold in retail channels, bars and cafes.  It is not unusual to be offered an after-dinner drink in a restaurant in Hungary - this will be palinka. 

In 2010 the government decided that palinka should receive direct help.  EU rules allowed a 50% tax reduction, but the government decided rural-made palinka should instead be tax free.  This gave a huge boost to the palinka sector and Scotch Whisky suffered, with exports worth £5.7 million in 2009 falling to £3.7m in 2013. 

In visits to Budapest, Scotch Whisky traders advised that the tax breaks were part of a wider government effort to boost local products.  They cautioned that an SWA dialogue with local officials was unlikely to help as the issues were driven by politics rather than compliance with the EU's technical rules.  We complained and the Commission initiated legal proceedings against Hungary.  

In the meantime, Hungary caused more difficulties in 2011 by increasing taxes on some spirits by 5% and others by 50%.  When we alerted the Commission to this problem, another complaints procedure was initiated.   

Our work with the Commission on the palinka complaint resulted in a referral to the European Court of Justice.  The Court ruled unequivocally in spring 2014 that the zero-tax rate was illegal.   Indeed, the breach was so clear the Court dispensed with the normal two-stage process for a verdict and declared immediately that Hungary breached EU rules.  This sets a useful precedent that we will use during the Commission's 2015 review. 

As yet it remains to be seen how Hungary will implement the ruling.  It is not happy and Cabinet Ministers have said the ruling is 'outrageous'.  Not long after the verdict, however, Hungary received another signal that its tax policies were unacceptable when the Commission sent the final warning letter on the second complaint.  Failure to harmonise tax rates as required will see this also being referred to the European Court. 

While we aim is to ensure Scotch Whisky does not face tax or other trade barriers within the EU Single Market, and can therefore compete on even terms with other spirits, it seems likely that Hungary will continue to present a challenging environment in which to apply these principles. 

Nick Soper, SWA director of European Affairs