How to save craft breweries?

The Ukrainian beer market is facing hard times: since 2011, the production volume has decreased by 1.6 times. Even so, the state budget received more than UAH 4.5 billion from the excise tax on products made last year.

In terms of production, beer accounts for half of the Ukrainian segment of alcoholic beverages. In terms of sales, beer is an absolute leader in the market.

The share of craft beer in the Ukrainian market is about 3%. For example, the overall US market’s craft share is growing every year and now is more than 12%.

The coronavirus crisis of the first half of 2020 affected the beer market as well. Due to the three-month ban on restaurant dining, craft breweries (small independent enterprises that brew beer according to traditional recipes) have suffered the most. 

Such producers depend on offline platforms and are limited to sales channels: they usually do not have access to a grocery chain. The tax burden and loan liabilities and rent payments have been a heavy burden for small breweries. As a result, most of them stopped production and lost 90% of their sales channels during the quarantine.

In addition to the crisis, the reduction in Ukrainian private breweries’ production is significantly affected by the excessive tax burden. Although amendments to the Law of Ukraine “On State Regulation of Production and Circulation of Ethyl Alcohol, Cognac and Fruit Alcohol, Alcohol Beverages, Tobacco Products, and Fuel” reduced the cost of a wholesale license for small breweries (UAH 30 thousand per year for a less than 300 thousand litres per year production volume) in 2016, the set limit of 300 thousand litres is 66 times less than the generally accepted European standard of twenty million litres per year.

This led to the fact that beer producers with volumes ranging from 300 thousand to 20 million litres per year pay the license’s full cost (500 thousand hryvnias per year). It is the same as beer giants with much higher production and profits pay.    

Besides, such breweries do not have any tax benefits for excise duty, as in other European countries. Because of this, large breweries enjoy an unfair competitive advantage, as compared to small brewers. Combined with forced quarantine restrictions, the tax burden is literally destroying Ukrainian craft brewing.

BRDO experts are convinced that reducing the excise duty on beer production by 50% and cancelling the wholesale license for companies producing less than 20 million litres of beer a year can improve the position of small breweries. 

According to the Association Agreement with the EU, Ukraine is obliged to harmonize its legislation with the European one, including taxation principles. The EU Directive on the harmonization of the structures of excise duties on alcohol and alcoholic beverages states that a reduced excise tax rate can be applied to “breweries that are legally and economically independent of any other brewery located in a territory that is physically separate from of any other brewery, and is not a licensed enterprise”. According to an EU court ruling, a licensed enterprise is a brewery that can use third-party trademarks and production processes. Today, 232 domestic breweries with annual beer production of fewer than 20 million litres satisfy these criteria. 

What economic effect do we have from the cancellation of wholesale licensing for craft breweries and the excise tax rate reduction?

Let me remind you that 204 small breweries can currently pay 30,000 hryvnias a year for a wholesale license. Another 28 small breweries can pay 500,000 hryvnias, and all together they can pay for the standard excise duty. The cancellation of wholesale licenses for craft breweries and the excise duty reduction will allow enterprises to save about 346.4 million hryvnias and use these funds to increase production. In the case of operation at full capacity, private breweries will create up to 3,000 additional jobs, and the Ukrainian budget will receive about 215 million of excise duty, unified social tax, personal income tax, and military duty. In the future, if there is no burden on small businesses, craft production development will allow increasing budget revenues significantly.    

In this way, craft breweries will get rid of the excessive fiscal burden, revive production after the corona crisis, increase production (and hence — the income tax), and employ thousands of citizens. This decision is pragmatic and effective, so it is for legislators to decide.