The Chief Executive’s Policy Address in October last year was undoubtedly met with gleeful downing of top-quality spirits in Hong Kong’s bars and restaurants as John Lee delivered welcome news to the liquor trade. In tax changes designed to bolster the industry in the face of stiff regional competition and falling local sales, the 100% duty rate for liquor with an import price of more than HK$200 was reduced to 10% for the portion above $200.

It was a move designed to boost not just the spirits trade, but also the development of associated sectors such as logistics and storage, tourism and high-end food and beverage consumption. There was a slight kicker to the euphoria, however, since the duty rate remained unchanged for the portion of $200 and below, as well as for liquor with a lower import price.

Whisky, brandy and other premium spirits constitute the bulk of Hong Kong’s imported liquor, representing about 98% of its total import value in the period from January to August 2024. Following the government’s reduction in the liquor levy, the average tax burden on these tipples is expected to decrease substantially – from just under 25% to more than 50% per litre, depending on the spirit you favour.

Grape success

This push to promote Hong Kong as a liquor distribution hub follows similar transformative tax breaks granted to the wine industry nearly two decades ago. In February 2007, wine taxes were cut by half, then completely removed the following year. Growth in the trade soared, and the city is now the world’s second biggest, and Asia’s most important, wine auction and distribution centre.

Auctioneer and wine specialist Robert Sleigh, then at Sotheby’s, recalls the amazing effect of the reduction and elimination of import tax on wine. “The wine market has never seen anything like it and probably never will again,” he says, describing Hong Kong’s spectacular rise to number-one market in the region within just 18 months. The local wine trade grew at an astonishing annual rate of 15.8% between 2008 and 2018, up from just 2.7% on average during the decade prior to the first duty tax cut in 2007. “Just the amount of stimulus that happened then – it was an extraordinary time,” he enthuses.

The elimination of wine taxes was perfectly timed, according to Sleigh. With the West still reeling from the 2007-2008 global financial crisis, coupled with the pent-up demand for Western luxury goods by Chinese consumers with huge disposable incomes, this “perfect storm” propelled Hong Kong into the wine hub of Asia.

Turning to liquor

The successful development of the Hong Kong wine sector was referenced in last year’s Policy Address as a template for elevating the territory into a major centre for liquor trade and distribution. Figures suggest the global spirits market is a bigger pie than the global wine market, with its sales of US$525 billion in 2023 exceeding those of wine by about 60%.

Furthermore, Asia has experienced rapid growth in its spirits market, which has ballooned by 79.3% in the decade leading to 2023, much faster than the 42% notched up globally. The rise of a youthful Asian population – 430 million people in the region were aged between 18 and 21 in 2021 – has played its part here, according to Hong Kong Trade and Development Council (HKTDC) analysis. The desire by young people to try new things, and their likelihood to turn to expensive wines and spirits as they become increasingly prosperous are factors here.

Another boon to the industry is that, post-Covid, leading international alcohol brands are keen to promote their wares in new markets eager to experiment and sample the finer things in life. With the growth of global communications and logistics services, selling traditional liquors overseas through channels such as online shopping is far easier than before. The global spirits market is set to soar from US$525 billion in 2023 to US$630 billion in 2027, according to market and consumer data provider Statista.

Tax deterrents

This is an encouraging backdrop for Hong Kong’s liquor importers to operate within, yet local growth in the spirits trade has been far slower than that of wine, and it remains smaller in value, totalling HK$9.9 billion in 2018 compared to wine sales of HK$15.3 billion. Many analysts have attributed this to the 100% spirits tax that was previously in force. The levy pushed up trading and administration costs here when compared with liquor hubs with less burdensome spirits taxes like Singapore.

The HKTDC also believes the high spirits tax discouraged industry players from organising and participating in trade fairs in Hong Kong, where tax and warehousing costs for on-site tastings were deemed too prohibitive.

Last October’s reduction in the high-end duty rate will significantly lower operating expenses of traders in Hong Kong, with tax-burden savings per litre estimated at 53.1% for brandy, 24.8% for whisky and 37.8% for other spirits.

Time will tell

Keith Archer, International Private Sales Director at Seeking Infinity, an investment consultancy specialising in the likes of whisky casks and art, believes a reduction in liquor taxes in Hong Kong was inevitable, given the current downturn in the retail market. A Hong Kong Bar & Club Association survey last year pointed to a significant drop in sales – a slowdown attributed to Hongkongers heading to mainland China during the holidays and the migration wave among wealthy consumers.

“It will be some time before we know how effective this new policy will be,” says Archer. “Many wholesalers still have inventory left over from before the tax reductions were put in place, and they will have to move this before offering the new tax discounts, so we don’t foresee much of an immediate effect on retail sales.”

In his view, a 100% reduction on liquor duty at all price points could spur a growth impetus similar to when wine tax was abolished in 2008. “As it stands, the current tax reduction only really benefits those consumers who prefer higher-value spirits,” he notes. Since imports costing HK$200 or less account for about 85% of spirits sales, “the effectiveness of these reduced taxes in encouraging greater consumption in the Hong Kong market is put into perspective”.

International thirst

Despite this, Archer remains positive that the development could revitalise the liquor trade in Hong Kong by attracting more consumers, enhancing brand visibility and fostering innovation. “Its success will depend on addressing logistical challenges, promoting responsible consumption and ensuring a supportive regulatory environment,” he adds. “What Hong Kong truly needs is an influx of overseas buyers and consumers to pick up the current market declines.” Indeed, data suggests that much of local spirits sales slips down the throats of visitors.

He also sees the recent reduction in liquor taxes as a win for local collectors of single malt whisky since rarer vintages can enter Hong Kong at a comparatively lower cost.

Raising a glass to China

Ultimately, Hong Kong has huge potential to become a major liquor hub. Importers could take advantage of enormous opportunities to deliver premium spirits into the mainland, and enjoy enhanced tax rates via cross-border e-commerce. Hong Kong could also become a base for showcasing China’s high-quality spirits, such as the valuable baijiu pours of Maotai and Wuliangye, to the world.

Archer urges the government to go the whole hog and completely abolish spirits taxes. He says: “If they were to give a full 100% tax reduction in the future as they have done for wine, this would have a big impact on spirits sales and make Hong Kong a much more attractive destination for liquor lovers than it already is.”