I decided to write this text because I received several comments on the basis of my past collaboration called "The ghost of wine travels through Mexico" in which I said that the wine sector in Mexico has grown an astounding 12% per year for the last ten years. In most of the comments people said that the government should lower taxes to help the development of the Mexican wine industry, since the high tax burden is an obstacle, especially because the national wine "pay more tax than imported".
Before anything else I want to thank all your comments. Let me say that you are right when you say that taxes are a drag on growth (at least theoretically). But you are wrong when you claim that Mexicans pay more taxes than imported wines. Nothing is more false since all wines that have the SHCP label, regardless of their origin, are paying the same taxes in Mexico. Those who do not have this seal awarded by the SAT are outlawed and therefore omitted in this analysis.
It is true that a high tax burden will always tend to limit the consumption of goods and services, since taxes are a cost themselves. To take a quick example we can see what has happened in the last year with the Mexican soft drink industry after the application of the tax on so-called “junk food”: a drop of 2.5%.
In the case of wine industry, bottles are taxed at a rate of IEPS (Special Tax on Products and Services) that varies depending on its alcohol content, for wine is generally of 26.5% and a VAT (Value Added Tax) of 16%. Moreover, businesses involved in any link of the value chain are taxed with the ISR (Income Tax). This tax burden does not explain why many times the Mexican wine is more expensive than the foreign one when all the bottles, not matter if they come from Chile or Baja California, pay the same taxes.
So why is it more expensive? Accountants are well aware that when the market has cheaper products, and these are taxed alike, there can only be three reasons: quality, subsidies or competitiveness.
How about the quality at the best price?
Foreign wines, as well as Mexican wines, have to pay similar manufacturing costs as well as taxes, as mentioned above; moreover, foreign wines have to pay import costs and tariff rates. This forces foreign wine industries to develop their wines at a lower cost to compete; unfortunately, this is achieved at the expenses of quality. However, when the quality and value proposition of some foreign wines is attractive enough to gain market it is time to analyse how those producers could offer cheaper prices without losing quality.
Support programs rather than grants
The reform of the Common Market Organisation (CMO) for European wine, who leads the practices and schemes of support for winegrowers producers in the world, which came into force on August 1, 2008, basically aimed to increase the competitiveness of producers, recover old markets and win new ones, and enhance the reputation of EU quality wine as the best in the world. That is, instead of lowering taxes or giving subsidies they decided to invite winemakers to be more competitive.
It comes down to Competitiveness
Accountants are well aware that for businesses to be more competitive they have to invest in high quality technology, better processes and well-trained people. Blaming taxes has served many Mexican producers and entrepreneurs not to get into the real discussion of background: a real need to improve the sector’s competitiveness.
In other words, to make the Mexican wine more accessible to the public offer we must improve the competitiveness of the wine industry through the investment in technology, improved processes and the training of professionals. To say that the Mexican wine does not grow because of the tax is a myth or an excuse to avoid the challenge of being more competitive.