What does Hong Kong’s huge liquor tax cut mean for Japanese whisky?

Historic news for Japanese whisky drinkers in Hong Kong, if not all of Asia, this week: Chief Executive John Lee Ka-chiu announced the liquor tax on imported spirits with 30% abv or higher and a price of over HKD$200 (~$26 USD) will be reduced from 100% to 10%. The significance of this cannot be understated. Today we’ll look at what this might mean for Japanese whisky.

The move comes after calls from industry as far back as 2019, when they looked at how Hong Kong has grown into a hub for wine in Asia after similar tax cuts over a decade ago. Between 2007 and 2017, wine imports to Hong Kong skyrocketed. Spirits were left out of those initial cuts, but it looks like things are about to turn around in a big way.

It’s worth noting here that the tax reduction applies to amounts beyond HKD$200. So if a 40% abv bottle is imported at a price of, say, HKD$1600 (~$206 USD), it would be subject to a 100% tax for the initial HKD$200, and then the remaining HKD$1400 would be subject to a 10% tax. Altogether, the new tax on that bottle comes to around $43 USD. Up until now, the tax was simply ~$206 USD.

I mentioned 40% abv in our above example, but it doesn’t really matter: Hong Kong doesn’t calculate their tax based on abv. It’s simply based on the import value of the bottle (an ad valorem tax). That’s to say, the more expensive a bottle of whisky is, the more it will enjoy the new tax rate.

For comparison purposes, Japan taxes imported spirits based on abv, ignoring imported value. In our above example, the same bottle would see a tax of merely 280 yen ($1.86 USD). For most purposes, the liquor tax in Japan is almost negligible.

Back to Hong Kong. That’s a massive reduction in import duties for the premium whiskies and other spirits we usually discuss on this site.

And how have exports of Japanese whisky from Japan to Hong Kong been going?

Pretty good! In line with global trends, Hong Kong’s imports ballooned from around 2019-2020, then peaked in 2021. In 2022, it was the 7th largest overseas market for Japanese whisky exports. Then, as we highlighted earlier this year, 2023 saw a 55% drop in JPY value. I largely attributed that to the crappy Chinese economy.

Things are looking up for 2024. The latest data we have as of this writing is for August 2024. Year to date, we’re already at JPY 1.38 billion in exports of Japanese whisky to Hong Kong, making it the third-best year on record. And there’s still an entire quarter’s worth of sales to come. We’re on course. These new tax cuts will almost certainly accelerate the pace of growth. In time, I suspect we’ll see Hong Kong overtake both Singapore and Taiwan for JPY value of exports (i.e. roughly triple the current numbers).

But it’s not all rainbows and unicorns. SCMP presented the other side of the coin in this piece, quoting one Wan Chai-based liquor shop owner who was concerned that the sudden tax cuts, and thus lower retail prices, could lead to increased interest from parallel traders.

The shop owner’s concerns are not misplaced. With a significantly lower liquor tax rate in Hong Kong compared to mainland China, a parallel trader could easily make bank muling pricey bottles of Japanese whisky. After buying in Hong Kong, the parallel trader would sell the bottle in the mainland at a price below their standard market price, and collect the spread. The multi-entry visa even enables traders to make several trips a day. You can see how this could significantly impact the inventory levels in Hong Kong.

The article also cited health concerns, as the new tax rate could, well, encourage drinking. As nomunication.jp encourages (responsible) drinking, you already know what camp I fall into.

Another point made in that SCMP article is that consumers of these high-end spirits are somewhat insensitive to price changes. I agree: Hong Kong’s whisky aficionados have probably become accustomed to cracking open their wallets wide open to drink most Japanese whiskies. In fact, some may even travel to Japan specifically to drink and buy Japanese whisky at primary market prices. But my guess is this mainly applies to existing whisky aficionados. With steep reductions in prices in both on and off-trade, I hope that Japanese whisky isn’t something people have to aspire to in Hong Kong. Instead, it should become something you actually drink.

So a big, big kanpai to Hong Kong for making this happen. Your move, Singapore!