Israel is to change how it taxes alcoholic beverages.

Starting early next year, the system will be based on alcohol content, rather then FOB (freight on board) or ex-factory prices. By 2012, all spirits will be taxed at a fixed NIS45 (US$10.38) per litre of alcohol.

The move threatens local producers of cheap vodka and gin, both of which are very popular in the country. The tax on vodka will be ILS17 per litre under the proposals, which is close to the current price for many lower-priced alcoholic drinks.

Currently, taxes on spirits can go as high as 280% on premium brands, but can be roughly ILS4 on a bottle of cheap vodka, sold at ILS24.37.

Several importers and drink makers in Israel have blamed the tax authority for accepting a plan presented by the local Diageo representative and Coca-Cola subsidiary, Israel Beer Breweries Ltd. Spirits (IBBLS). They claim this plan "neglects" to correct a situation by which RTDs will become cheaper. IBBLS is the distributor for Diageo's Smirnoff Ice RTD brand.

Also, by beginning the implementation of the reform with whisky and gin, rather then across the market, IBBLS will be in a better position, with Johnnie Walker becoming much cheaper. At the same time, IBBLS sells very little low cost gin or vodkas, meaning it will not be affected by the tax increase on these products.

The plan will also bring an end to the highly successful duty free business in Israel, as the tax on high-end products will become virtually negligible.