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Excise tax expands past alcohol, tobacco and fuel

Excise taxes are popular with governments because they are a major revenue generator, easy to collect and relatively recession-proof.

Image: Massimo Gammacurta

By Ross Tieman

Excise taxes have been around so long, it is tempting to think of them as a historical legacy. But there is nothing antiquated about them — they are a major revenue generator for governments today and becoming more popular by the year.

Take the US, where state excise taxes on motor fuel, insurance, tobacco, alcohol and other products totaled US$140 billion in 2014 — three times the amount that states raised from corporate income tax. Excise taxes collected by US states increased 4% on average between 2010 and 2014, according to EY data.

Tax codes suggest that “wine is the drink of moderation; beer is the drink of the common man; spirits are bad.“

Emil Sunley, Senior Advisor for the International Tax and Investment Centre


This growth in excise tax revenue is mirrored in many other countries across the world as policymakers are lured by the prospect of easy collection — commodities such as salt, tobacco and alcoholic drinks have been subject to excise taxes for centuries in Asia, Europe and elsewhere. Excise taxes also tend to be less affected by economic fluctuations, including the global financial crisis a decade ago. 

In 2013, excise taxes among members of the Organisation for Economic Co-operation and Development (OECD) and six selected African countries raised US$1.03 trillion, according to an EY analysis. That was 68% of the value of corporate income tax collected in the same time frame, and nearly half the amount raised through value-added tax (VAT).

Today, excise taxes are emerging as the new elixir for policymakers. Governments are using them to sustain tax revenues in a world of changing monetary, fiscal and trade policies and to cover the external costs related to the use of certain goods and services.

By the end of 2017, for example, the six members of the Gulf Cooperation Council (GCC) — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) — were to introduce levies for the first time on tobacco, carbonated drinks and energy drinks.

The trend merits close attention from corporate tax executives and policymakers alike who may be focused more on changes to corporate income tax policies.

“Excise tax used to be the stepchild of tax policy and got very little attention,” says Sijbren Cnossen, Professor Emeritus at Erasmus University in Rotterdam, Netherlands. But he says this is changing as governments and people increasingly understand the external costs certain goods or services can impose on a society.

Different approaches to taxation

Tobacco, alcohol and fuel have traditionally formed the cornerstones of excise taxes, although the decision on which goods to tax and by how much varies widely from country to country, including among member states of the European Union (EU). Grape-growing countries such as Italy, Portugal and Spain have no excise on wine, for instance. But farther north, taxes on alcohol tend to rise. In Norway, excise on wine is US$7 a liter, according to the OECD’s Consumption Tax Trends 2016.

Hard liquor tends to be more heavily taxed. Iceland’s excise on spirits reaches US$104.62 per liter of pure alcohol, more than 10 times the level in the US and Canada, according to the OECD. 

Tobacco taxes also vary greatly among OECD members. Many countries impose an ad quantum excise tax per 1,000 cigarettes and an ad valorem excise tax based on price, then top these off by imposing a VAT or sales tax.

This triple tax whammy is designed to keep tobacco taxes high and rising with inflation. The OECD calculates that among member states, the total tax burden as a percentage of the average retail sales price ranges from 42.5% in the US to 86.5% in Ireland.

“Taxing motor fuel, alcohol and tobacco is attractive because the taxes are relatively easy to collect,” says Walter De Wit, a senior member of EY’s Global Trade practice. “You can collect them from a relatively small number of companies, and easily work out how much they owe you.”

Along with considerations about how local industries and jobs could be affected by excise taxes, governments often make moral judgments when determining excise taxes. And jurisdictions with porous borders must also consider how big differences in rates could lead to smuggling and related crime. 

Many tax codes suggest that “wine is the drink of moderation; beer is the drink of the common man; spirits are bad,” says Emil Sunley, a senior advisor for the International Tax and Investment Center and retired Assistant Director in the Fiscal Affairs Department of the International Monetary Fund.

Expanding list

The list of goods with excise taxes keeps expanding. The list now includes chocolate, coffee, mobile phones, plastic bags and soft drinks to name but a few. 

Excise policymakers used to target goods viewed as luxuries. Now, data and analytics are making it possible to quantify the negative effects from an individual or group’s behavior, which is transforming the excise landscape.

“When we do certain things, like smoking, drinking or polluting, we impose costs on other people, on society,” says Cnossen. “These costs are not accounted for in the price. The excise is the instrument to do that.”

Economists call these “external” costs. Smokers, for example, can become ill, or their smoke can irritate and harm others. 

The excise taxes also cover the cost of two complementary strategies deployed by governments to discourage so-called antisocial behavior: regulation and public education. In many countries, the number of smokers is now declining.

“The rise of digital government and the deployment of excise taxes in places like the UAE and China is really setting the scene for the digitalization of tax collection.“

Sam Dagley, Manager, EY Excise Tax Service team


Since excise taxes have reduced smoking, policymakers have begun experimenting to see whether they could curb other bad habits. Obesity and diabetes are becoming a global scourge, pushing up health care costs for governments. Hence the new taxes on soft drinks, which are aimed at encouraging manufacturers to reduce sugar content and persuading consumers to choose healthier options. 

But it’s not always so straightforward. Excise taxes can also trigger a consumer backlash and unintended consequences. Take Chicago’s Cook County, the second-most populated county in the US, which introduced a tax on sweetened drinks during the summer of 2017. It ended up repealing the tax a few months later as consumers bought their groceries in other counties to avoid paying the tax. 

“I can see a situation occurring where one county imposes a tax on soft drinks, thus incentivizing people to purchase their soft drinks from a store in a nearby or neighboring county that doesn’t impose the tax — and perhaps while the people are visiting this nearby store, they buy the rest of their groceries,” says Ashley Scheele, EY Excise Tax Service Leader based in Houston.

In such a situation, the government in the consumer’s home county or even country loses the revenue from the excise tax on the soft drinks as well as the sales tax on the rest of the groceries. And the health benefits of the excise tax will not be achieved. In other words, calorie consumption won’t fall if tax avoidance is easy. 

Taxing emissions

Perhaps the biggest question that governments are struggling with today is whether excise taxes can fix the world’s carbon emissions problem. Some 170 countries that have ratified the Paris Climate Agreement will decide individually what method they will use to reduce their excess emissions, such as environmental taxes and carbon pricing mechanisms, including cap and trade schemes.

Car users around the world already pay a mix of excise taxes, including a purchase tax, registration or usage tax and fuel taxes. Some jurisdictions offer tax credits to buyers of electric vehicles. Excise tax policies, combined with regulatory targets, are increasingly shaping the strategies of carmakers, from the research and development stage through to plant location and marketing. 

Professor Cnossen predicts governments will continue to raise and extend excise taxes — to aviation and shipping fuels, for example — as they seek to model the external costs of burning fossil fuels.

Winning support

If new taxes are to win public support, policymakers must tread carefully. Excise taxes tend to be regressive: they swallow a larger proportion of revenue of poorer households at a time when inequality has become a global issue. 

For enterprises, too, they pose a challenge. Tax administrations are digitalizing indirect tax systems, including excise taxes, and businesses must be able to comply with new filing and other requirements. As Sam Dagley, a Houston-based manager in the EY Excise Tax Service team, points out, it is becoming easier to measure sales of goods such as fuel that are taxed by volume — electronically and remotely. In effect, the burden of tax collection is being shifted from revenue authorities to certain businesses put in a “trustee” relationship with the taxing jurisdiction. 

“The rise of digital government and the deployment of excise taxes in places like the UAE and China is really setting the scene for the digitalization of tax collection,” says Dagley.

The growing enthusiasm for using taxes to shape behavior also has broader ramifications for businesses. Excise tax policies have long influenced the development of automotive products, transport networks, retailing and alcoholic beverages, but mainly at the margins. But now they are extending their influence to ever more sectors.

Traditionally, excise taxes were successful because they were levied on goods like salt and tobacco for which demand was inelastic. Now they are being recast as heavyweight tools to curb consumption and change behavior. For example, excise taxes on sugary drinks to address obesity or taxes on cars that run on fossil fuels to encourage the adoption of more environmentally-friendly electronic vehicles. 

These new excise taxes are affecting consumer behavior and also have financial implications for businesses. Going forward, excise taxes could end up changing business models and playing a bigger role in corporate strategy.

Key action points

  • Closely monitor excise tax developments in sectors and jurisdictions in which you operate
  • Review the extent to which excise taxes are taken into account in business models and strategic corporate decisions
  • Consider the external impacts of your goods or services. Could they trigger concerns from policymakers?
  • Evaluate the effect of technology on excise tax collection. Can automation and digitalization provide more insight into your excise tax burden?

Proceed with caution: changes ahead for car and fuel taxes

Around the world, excise taxes send many contradictory messages to car buyers, car users and car makers.

Cars have long been a favorite target of tax authorities. Many jurisdictions tax their purchase via a registration tax. Others impose a road tax on their use, tolls on bridges and highways and taxes on company cars. Fuel taxes are also a big source of revenues and are easily collected since there are only a few producers. 

Governments have many justifications for such taxes: drivers have accidents, clog the roads, and emit greenhouse gases, undermining the quality of life for everyone else. Along with using excise taxes to cover the external costs to society, governments can also offer tax credits to support the development of greener, more efficient vehicles.

In the US, for example, buyers of plug-in electric drive vehicles benefit from a tax credit of US$2,500 to US$7,500 (depending on battery size). The tax credit fades progressively once the manufacturer has sold 200,000 vehicles.

Faced with the consequences of global warming, governments now face the challenge of turning these piecemeal tax regimes into a coherent lever to contain carbon emissions. Automakers, and their customers, are heading for a storm of technology and tax change in the years ahead.

Source: IRS

Electronic cigarettes: blurred lines

It used to all be so simple. Cigarettes and other tobacco-related products were taxed. But electronic nicotine devices have got policymakers scratching their heads. Should they also be taxed like cigarettes? Eight US states have decided they should. Some European countries agree. But many other jurisdictions are waiting for further evidence about consumer behavior and health impacts before making a move.

Historically, governments taxed tobacco because it was a luxury, and with relatively few cigarette makers and importers — at least in western countries — it was an easy tax to collect.

Since science proved tobacco kills, many states have increased tobacco excise taxes to fully cover the costs to society from active and passive smoking.

But is so-called vaping — the use of electronic cigarettes — less harmful than smoking? While e-cigarettes lack the many carcinogens contained in tobacco smoke, some do contain nicotine, which is toxic and addictive. Recent studies have found that e-cigarettes containing nicotine could be linked with a greater risk of heart attacks and strokes, and harm the lungs of users.

Image: Shutterstock


As governments address e-cigarettes’ health-related questions, they must also determine if a tax is appropriate for such items, at what level, and how it should be calculated.

So far, governments have taken different approaches. In the US, some states based their e-cigarette taxes on wholesale price, while others based the law on milliliters of consumable product.

In Europe, several EU members, including Portugal and Italy, have so far opted to tax e-cigarettes or the liquid contained in them. 

In this niche industry, tax uncertainty will remain high for some years to come.

Sources: “E-Cigarettes Containing Nicotine Linked to Increased Risk of Heart Attacks and Stroke,  Study Finds,” Independent, September 12, 2017; “Vaping may cause unique health problems as dangerous as smoking cigarettes, finds study,” Independent, September 24, 2017; “Extras on Excise: While States Start Taxing E-Cigarettes, Proposed Federal Restrictions Go Up In Vapor,” Bloomberg BNA, January 18, 2017.

Sugar: the new “sin” tax

Britain’s new sugar tax won’t take effect until April 2018, but it is already changing behavior. Soda manufacturers are reducing sugar in their products by up to 50% to escape the tax. 

That’s good news for the UK government in terms of health policy, although less so on the tax revenue front. The Office for Budget Responsibility predicts revenue from the tax will be only £380 million, 27% less than forecast. Philip Hammond, UK Chancellor of the Exchequer, has said he is “delighted” to see the tax making an impact amid a national obesity epidemic.

The UK is one of many countries around the world that are introducing excise taxes on soft drinks and other products containing high levels of sugar to try to address rising obesity rates. A single can of soda can contain as much as 10 teaspoons of sugar, according to the World Health Organization, more than the maximum recommended daily intake of 6 teaspoons of free sugar.

In Mexico, for example, sales of sugary drinks declined for two years in a row after the government imposed an excise in 2014 on carbonated soft drinks, fruit drinks and iced teas. The six states of the Gulf Cooperation Council will introduce a 50% ad valorem excise on carbonated drinks by the end of 2017, affecting 54 million people.

Image: Massimo Gammacurta


Sugar taxes around the world*

*Countries that have introduced or plan to introduce taxes on sugar, including sugar-sweetened beverages (SSB)

Europe

  • The UK is set to introduce a tax of 18 pence per liter on soft drinks with more than 5 grams of sugar per 100ml, and 24 pence per liter on soft drinks with higher levels of sugar in April 2018.
  • France first introduced a tax on SSBs in 2012, and plans to increase the tax to 20 euros per hectoliter for drinks that contain more than 11g of sugar per 100ml.
  • Portugal introduced a tax on soft drinks in 2017. There is a tax of 16.46 euros per 100 liters on soft drinks with more than 80 grams of sugar per liter, and a tax of 8.22 euros per 100 liters on soft drinks with lower levels of sugar.
  • Spain’s Catalonia region introduced a tax on sugary soft drinks in 2017.
  • Belgium increased its tax on sweetened drinks in 2016 to 0.068 euros per liter. 
  • Finland introduced a tax of 0.95 euros per kilogram on sweets and ice cream in 2011, but the European Commission said the tax system was unfair because imported sweets were also subject to import duties. Finland scrapped the tax on candy in 2017, though a tax on nonalcoholic sugary beverages remains in place. 
  • Hungary introduced a tax on food with high levels of sugar, fat and salt along with higher tariffs for soft drinks in 2011.
  • Ireland plans to introduce a tax on sugary drinks in 2018 of 30 cents per liter on beverages with more than 8 grams of sugar per 100ml, and 20 cents per liter on beverages with 5–8 grams of sugar per 100ml.

Asia/Oceania

  • Brunei introduced a US$0.29 per liter tax on soft drinks in April 2017. 
  • In Thailand, taxes on sugar-sweetened beverages range from US$0.15 to US$1.33 per liter. 
  • Laos has a 5%—10% ad valorem tax on soft drinks, soda, fruit juices and energy drinks.
  • Cambodia levies a 10% ad valorem tax on imported beverages. 
  • Vietnam plans to introduce a special sales tax on soft drinks in 2019.
  • Fiji announced plans in 2017 to increase taxes on SSBs by 15% to 35 cents per liter.
  • Kiribati introduced a 40% tax on sweetened drinks in 2014. 
  • Tonga introduced a tax on SSBs of 1 Pa’anga per liter. 
  • Vanuatu introduced a tax on SSBs of 50 Vatu per liter in 2015.

Africa/Middle East

  • South Africa will introduce a tax on sugary beverages in 2018. 
  • Mauritius introduced a tax on soft drinks in 2013, and extended the tax in 2016 to all sugar-sweetened nonalcoholic beverages. 
  • The GCC members agreed to introduce a 50% ad valorem excise on carbonated drinks by the end of 2017.

North America/South America/Caribbean

  • Mexico introduced a 1-peso-per-liter tax on SSBs in January 2014. 
  • In the US, the first tax on SSBs was introduced in March 2015 in Berkeley, California (US$0.01 per fluid ounce). Other US cities have also began taxing soft drinks including Seattle, Washington; Philadelphia, Pennsylvania; Boulder, Colorado; and Oakland, California.
  • Ecuador introduced a SSB tax of USD$0.18 per 100g of sugar per liter. 
  • Barbados introduced a 10% excise tax on SSBs in 2015.
  • Dominica introduced a 10% excise tax on SSBs and food with high levels of sugar, including chewing gum and chocolate in 2015.
  • Chile introduced an ad valorem tax on sugary drinks in 2014, and increased it in 2015 to an 18% ad valorem tax on drinks with more than 6.25 grams of sugar per 100ml in 2015. A 10% tax is levied on beverages with lower levels of sugar.

Sources: World Health Organization; “Soda wars: the UK’s tax on sugary drinks is working,” CNN, March 9, 2017; “UK pushes ahead with sugar tax,” BBC, December 5, 2016; “Sales Fall Again in Mexico’s Second Year of Taxing Soda,” The New York Times, February 22, 2017;

How we can help: Indirect Tax Services

CONTACT

Sam Dagley

samuel.dagley@ey.com

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Ashley Scheele

ashley.scheele@ey.com

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Walter de Wit

walter.de.wit@nl.ey.com

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