Diageo SA, a subsidiary of a British liquor company, has emerged victorious in a high court appeal on the lower excise tax rate it will pay on its Cape Velvet Cream liqueur.
The company produces spirits such as Smirnoff Vodka, Tanqueray gin, Captain Morgan rum, Johnnie Walker and J&B Whisky.
The case hinged on whether the inclusion of vanilla essence in its Cape Velvet liqueur, one of the ingredients marginally affecting the alcohol volume, disqualified it from a lower tax rate. Taxes on alcohol are determined based on the alcohol content, with wine, beer and spirits each paying different rates.
In 2011, the Treasury introduced lower tariffs on cream-based liqueurs to encourage the use of wine-based spirits in the production of liqueur, as opposed to cane-based spirits but the products could contain only wine to benefit from the incentive.
Without the lower tariff, using wine spirits in the manufacturing process of certain liqueurs is economically unviable.
These measures were put in place to promote the use of wine, as wine farms are labour-intensive and contribute to job creation.
Cape Velvet Cream, includes vanilla essence, which contains a minuscule quantity of alcohol.
The Sars commissioner interpreted the presence of even the small amount of alcohol in the vanilla essence as disqualifying Cape Velvet from the new tariffs that specify the products can contain no additional alcohol besides wine-based spirits.
Diageo argued that the alcohol content of the vanilla flavouring is so minimal that it is “insignificant and should be disregarded”.
The flavouring has an alcohol by volume of about 0.000252%. The vanilla ultimately adds 0.00004% alcohol to the final product, with the wine spirits contributing 15.9999996%.
“A 750ml bottle of the Cape Velvet cream with an alcohol rate of 16%, thus contains 0.0003ml of alcohol from the vanilla,” the court judgment reads.
The high court initially agreed with Sars’s interpretation and ruled Cape Velvet could not benefit from the lower tariff, but on appeal, a full bench of the North Gauteng high court overturned the decision.
The court last week concluded that the alcohol content in vanilla essence did not disqualify Cape Velvet from the lower tax rate.
The full bench found the lower tariffs were introduced to encourage and promote the use of the more expensive wine spirits in the manufacturing process of liqueur and it would undermine their purpose due to the use of vanilla essence with its minimal alcohol content.
The judgment read: “It would be inherently contradictory to find that a product of which the alcohol beverage volume is only increased by 0.00004% excluded from reaping the benefit associated by the introduction of the lower tariff. To find otherwise would be to apply a meaning that will lead to insensible and unbusinesslike results.”
Diageo won with costs, meaning Sars must pay the legal fees of two advocates.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.