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United Distillers forms subsidiary in wake of Brazilian tax war
Impact International / May 1, 1997

Larry Luxner

United Distillers has changed its representative office in São Paulo, Brazil, into an importing company following the expiration of its distribution and sales agreement with Bacardi Martini last December.

According to the São Paulo newspaper Gazeta Mercantil, UD will spend $25 million during 1997 to reinforce its presence in the Brazilian market, which accounts for 15% of the conglomerate's Latin American sales.

While United Distillers officials in Brazil weren't available for comment, other industry observers speculated that Bacardi-Martini declined to renew its agreement with UD because of rising levels of "parallel legal imports" arriving from Belgium, Paraguay, Germany and other sources.

"Goods are coming in from all over, and the legal authorized representatives are being torpedoed by other distributors from around the world who ship to Brazil at lower prices," said one liquor industry source who asked not to be identified. "The whisky market increased substantially over the last few years, but a lot of it isn't imported by the authorized rep. They now have to set up their own distibution because nobody wants to take it on."

Uruguay has reportedly become a big supplier of liquor to Brazil because of lower freight rates from Europe to that country. Also, thanks to the presence of tax-free zones there, the Uruguayan importer pays no taxes and the product goes straight into bonded warehouses.

"They can ship smaller lots and eliminate origin markings so you don't know who shipped it, then ship across the border into Brazil in smaller quantities, mixing and matching," the industry source told Impact Internaitonal. Making matters worse is the fact, he said, that "there's a war going on between the Brazilian states, which give incentives to attract industry. Whereas the state of São Paulo charges a 25% sales tax, Pernambuco charges 7% sales tax. So they declare the goods are going to Pernambuco and pay 7%. What happens in practice is that the goods disappear on their way to Pernambuco and get sold in São Paulo."

As a result, United Distillers and other companies "are probably only achieving only a third of the volume of legally imported goods."

The problem started about a year ago and has become more intense in recent months, though the Brazilian Beverage Association (known as Abrabe) is now addressing the issue, according to the industry observer. "We are hoping the government will standardize the state levels of taxation," he said. "This should bring some degree of normality to the market."

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