May 20 (Bloomberg) -- Fernando Zenteno is considering ripping up 15-year-old chardonnay and cabernet sauvignon vineyards in Chile’s central valley as the country plans to raise wine taxes to the highest among wine-producing nations.
“There’s no chance that we’ll remain in the wine-grapes business with the tax,” Zenteno said in a phone interview from Curico, 207 kilometers (129 miles) south of Chile’s capital of Santiago, where he runs his family’s vineyards. “We prefer to move into something more profitable, possibly cherry trees.”
Chile’s government included a tax on alcoholic beverages in a bill being debated in the nation’s Congress. The measure, designed in part to counter the highest alcohol consumption rate in South America, would raise taxes on an average bottle of wine to 294 pesos (52 cents) from 183 pesos (33 cents), according to industry group Wines of Chile.
That compares with almost zero taxation of wine in France, Italy and Spain, the largest exporters in the Organization for Economic Cooperation and Development, of which Chile is a member. The proposed tax is similar to rates in Australia -- also an OECD member -- where income per capita is more than twice Chile’s.
Non-wine exporters in the OECD charge an average excise tax of about $1.85 per liter of wine, according to a report from the end of 2012.
The growing tax burden imperils the small vineyards of Chile’s central valley, according to speakers at the wine industry’s annual conference in Curico last month. Even famous vineyards such as Vina Concha y Toro SA and Montes SA, which export the majority of their output, say they will see sales crimped by the increase.
“The government is saying that the tax will put us in line with alcohol taxes of all OECD countries, but they’re wrong,” Rene Araneda, chairman of wine producers association Vinos de Chile, said at the conference. “France, Italy and Spain, our rivals in the OECD, don’t tax wine and we should be comparing ourselves to them.”
The government proposal would raise the tax for wine and beer to 18 percent from 15 percent and add a variable tax of 0.5 percent per degree of alcohol content. That would push the average tax for wine to 24 percent compared with 20 percent for beer.
Finance minister Alberto Arenas, in defending the tax, said it’s directed to all alcohol consumption and puts Chile in line with some other OECD countries.
“It’s not that the Chile isn’t interested in wine exports,” he said in an interview May 6 in his office in Santiago. “It has to do with the good practices among OECD member countries,” as well as “public health,” he said.
The measures are part of a package of tax changes presented to legislators that aim to raise 3 percent of gross domestic product, or about $8.2 billion, to finance programs proposed by President Michelle Bachelet. The benefits include free education for all.
Approval of the package is expected later this year, with Bachelet’s ruling coalition holding a majority in both chambers of the Chilean Congress.
Chile by far has the highest alcohol consumption rate in South America, according to a May 12 report from the World Health Organization. Chilean men drink 13.9 liters of pure alcohol per capita a year, while women drink 5.5 liters and the average is 9.9 liters. Argentina is second with an average 9.3 liters and Venezuela is third with an average 8.9 liters.
In the Chilean market, wine has been replaced by beer as the drink of choice. Wine consumption fell to 212 million liters in 2012 from 542 million liters in 1972, while beer consumption increased to 693 million liters from 204 million liters in that period, according to Vinos de Chile.
“Some of us are barely covering our costs, and the large wineries won’t want to transfer all of the tax hike to local consumers and lose market share to drinks like beer,” Zenteno said in discussing whether he will keep his vineyards. “They’ll turn around and force on us a lower price for our grapes.”
Wine-grape producers are selling their produce wholesale to local wine bottlers at between 97 and 150 pesos per kilogram, according to data from Chile’s Agriculture Ministry.
Prices have fallen after two years of record local production and grape sellers are making a gross profit of about 10 to 15 pesos per kilo, according to Fernando Medina, president of Asociación Agricola Central. The group represents farmers in the Maule region, Chile’s agricultural heartland.
“If we see a drop in demand -- and that should happen because wine will be taxed more than beer -- then the wine companies will surely transfer a part of the tax to the growers,” Medina said. “It will push lots of farmers out of business.”
The products most affected will be lower-priced bulk wines, which represent 80 percent of sales in the local market, Fitch Ratings said in a May 7 report. The tax increase could lead to a price jump of almost 20 percent, the report said.
Chilean wineries exported $1.47 billion in bottled wine in the 12 months through March, 2.6 percent more than the previous year, and at an average price of $30 per case, according to Vinos de Chile.
The tax increase will weaken the domestic market, making it harder to develop premium wines for sale abroad, according to Aurelio Montes, founder of the Chilean winery named for him.
“A strong local market is a good takeoff platform to promote our wines abroad,” Montes said in an interview. “When your country is weak, an international buyer will get a bad impression. If the government continues increasing our tax burden, then Argentina, South Africa, California will quickly pass us by.”
To contact the reporter on this story: Eduardo Thomson in Santiago at firstname.lastname@example.org