Distell loses legal battle to save tax on Amarula

Tariff classification

Distell's fight with the South African Revenue Service (SARS) over the classification of Amarula saw it trying to have its cake while eating it - even by changing the Amarula recipe. It wanted to pay less tax while preserving the image of Amarula as a spirit-based drink equivalent to Bailey's Irish Cream.

The documents became public after last month's case in the North Gauteng High Court, in which Distell challenged SARS's tariff classification on 14 liqueur drinks, to avoid paying higher excise duty. Distell specifically excluded Amarula from that court challenge, to avoid negative publicity for the brand.

Judge Cynthia Pretorius has yet to make a ruling. SARS declined to comment pending a ruling.

In a letter to the company late last year, the office of the state attorney, acting for SARS, summed up Distell's dilemma.

"In order for Distell to successfully appeal (against SARS's) determination (of the new tariff category), it has to say and argue that Amarula Cream is not a liqueur or spirit-based product but a winebased aperitif - a class of product that is generally regarded as being inferior to spirit-based beverages such as liqueurs," state attorney official DC du Toit wrote.

This created a marketing headache for Distell. While the denatured wine - stripped of colour and flavour - used in Amarula may not differ materially from a drink made solely of spirit, it challenges consumers' image of the drink.

"I would have thought it was like Bailey's Irish Cream or all those others," said Chris Gilmour, an analyst at Absa Investments. "It wouldn't have crossed my mind that it was made from wine. I have to confess, the more I think about it, a winebased liqueur - ugh."

Local vs export

The court documents, numbering more than 650 pages, show that Distell uses different formulations of the drink for local and export markets. The local version uses fortified wine and spirit, while the export version is pure spirit. Amarula is the world's second biggest-selling cream liqueur.

"That's damaging," Mr Gilmour said. "South Africans rightly take umbrage that the fruit we get is substandard and the best stuff all goes to export. That just reinforces all the old stereotypes that export is good, local is bad. The perception may be wrong, but perceptions are powerful...."

Distell MD Jan Scannell yesterday said optimising the formulation of any drink to keep the excise duties low was normal global practice and he did not expect any backlash.

"The tastes are the same. The neutral spirit part doesn't make a difference to taste."

Until this year's national budget that unified the excise duty for both spirit-based and fortified wine-based drinks, the company saw the duty on Amarula jump from R4,33 per litre of absolute alcohol to R93,03. The tax liability dating back to the original 2006 classification is unclear.

While Distell does not break down how much Amarula it sells overseas and domestically, international industry figures show it sold 345000 cases in 2009. Assuming it exported a fifth - exempting it from excise duty - the extra burden on the 276000 cases sold domestically equates to just more than R28,5m.

Court case

Distell's realisation that it faced an extra R28m tax bill - as calculated by SARS - caused it to reconsider its earlier decision not to contest the tariff ruling. But SARS said Distell had left it too late to amend papers prepared for the high court case last month.

Distell said yesterday that the new rate of duty, for both fermented and distilled beverages, was set in February at R38/l of alcohol. The company did not respond to questions about the tax shortfall it has had to pay since the original 2006 reclassification.

The lengths to which Distell went to try to persuade SARS to keep the fight over Amarula out of court reveal the company's fear of damage to its brand.

"If Amarula Cream is the subject matter of court proceedings which are in the public domain... (the) negative publicity could irreversibly damage the reputation and image of the Amarula Cream brand leading to huge losses of sale," Distell's attorney wrote to the state attorney in June 2009.

"There is even a bigger risk in terms of negative publicity, especially at a time leading up to a global event such as the Soccer World Cup.

"Amarula Cream and (other Distell brand) Nederburg Wines are the only true South African non-beer liquor brands which have Fifa endorsements..."

The argument found little sympathy from SARS and in September 2009 Distell gave in.

Source: Business Day