Liquor multinational Diageo trumps Sars in fight over tiny quantities of vanilla

A smidgeon of vanilla in Cape Velvet does not disqualify the cream liqueur from a lower tax rate. That’s the view of the Pretoria High Court after it ruled in favour of the global liquor brand, Diageo, in its appeal against an earlier ruling for the South African Revenue Service (Sars).

The dispute revolved around the tariff determination for liqueur, in which the Sars Commissioner insisted that “non-alcoholic” meant 0% alcohol, and since vanilla extract contained 0.6% alcohol, Cape Velvet did not qualify for a lower tax rate.

South Africa taxes different forms of alcohol differently. Beer and spirits are taxed based on the alcohol by volume (ABV), while wine is taxed based on litres irrespective of the ABV. Different tax rates are applied depending on whether the product is fermented or distilled.

Generally speaking, non-alcoholic drinks are defined as containing less than 0.5% ABV, or less than 1.2% ABV if based on a fermentation product.

On 5 July 2023, a full bench of the Pretoria High Court overturned the earlier ruling that vanilla flavouring added to Cape Velvet constituted an alcoholic ingredient, setting aside the office’s determination and finding that the law does not take account of alcohol by volume that is so minuscule that it could be excluded as a “non-alcoholic ingredient”.

The vanilla flavouring added to Cape Velvet contains 0.6% alcohol. Mixed into the flavouring tank, the wine spirits ultimately contain an alcohol content by volume of 0.000252%, with the flavouring contributing 0.00004% ABV of the final product, while the wine spirit contributes 15.99999964% ABV.

The Treasury proposed lower excise duty rates for wine spirits during the Budget review of 23 February 2011. A reduced excise duty rate was then introduced so that wine spirits could be competitively used as a substitute for C-spirits (derived from other sources such as sugar cane) in the manufacture of spirituous beverages. This lower tariff made it more economical to use wine spirits.

Diageo pointed out that “non-alcoholic beverage” means beverages of an alcoholic strength by volume not exceeding 0.5%, with the volume seen as a threshold between alcoholic and non-alcoholic beverages.

It argued that the alcohol content of the flavouring was insignificant and should be disregarded and that Sars policy provided that the ABV of a product should be measured only up to the second decimal place. The ABV added by the vanilla to the final product was not a dutiable quantity.

“The dutiable quantity of and excise duty on spirits/spirituous products is assessed on the total alcohol contained in the product, expressed in litres of absolute alcohol… rounded off to the second decimal point, contained in the total bulk volume of the product removed to the local [South African Customs Union] market for accounting purposes.

“The bulk volume of spirits is rounded to the second decimal point; i.e. where the third decimal point is less than .005, it is rounded down to 0.00 and where the third decimal point is 0.005 or more it is rounded up to .01…”

The Sars commissioner contended that “non-alcoholic” meant 0% alcohol and since the vanilla extract contained 0.6% alcohol, there was no argument.

In relying on the dictionary definition of the word, the commissioner stated that the term “ingredient” includes “something that enters into a compound or is a component part or any combination or mixture; one of the parts in a mixture; and a component part or element of something”. “Alcoholic” is defined as “containing alcohol and containing or relating to alcohol” while the definition of “non-alcoholic” includes “not containing alcohol”.

The commissioner furthermore pointed out that Diageo did not contest the tariff determination in relation to three of its other products: Cape Velvet Chocolate Cream’s vanilla flavouring contains 27.12% ABV; the CV Strawberry Cream’s flavouring contains 28.6% ABV; and CV Toffee Cream’s flavouring contains 14.7% ABV.

Since Diageo did not appeal against the tariff determination of these products, the commissioner claimed that Diageo’s acceptance of these determinations indicated that it accepted the presence of alcohol in an ingredient would cause the product to be disqualified from being classifiable for the lower tariff. 

In her ruling, Judge Elmien van der Schyff found that the law did not take account of an ABV which was so minute as not to be appreciable to exclude an ingredient from the ambit of “non-alcoholic ingredient”.

She also issued a cost order against the revenue service.

In 2011, Distell lost its four-year battle with Sars, in the same court, in which it challenged the tariff classification on 14 aperitifs, to avoid paying higher excise duty.

Distell uses different formulations of the drink for local and export markets. In court papers, it was revealed that the local version of the popular liqueur was different from the export version, as a blend of fortified wine and spirit was used in the former while pure spirit was used in the export version, which was therefore of superior quality.

In South Africa, cream-based liqueurs made from wine-based spirits attract lower taxes than cane-based spirits. At the time, Distell MD Jan Scannell told Business Day that optimising the formulation of any drink to keep the excise duties low was normal global practice.

“The tastes are the same. The neutral spirit part doesn’t make a difference to taste.”

Alcohol is found in a surprising variety of foods and beverages, although at low levels: very ripe bananas, bread, fruit juices, yoghurt and kefir, as well as kombucha. DM