Worldwide trends in excise duties: green, grey, coffee or sugar?
In recent years, governments have been prolific in the creation of excise duties, looking to these taxes to find revenue from targeted industries or consumption profiles.
What do excise taxes have in common?
From one side of the globe to the other, different countries may apply different criteria in qualifying what is an excise duty and how some taxes should apply. But whether duties are environmental or health related, or are only imposed on certain sectors, we still can find characteristics in common.
An excise duty is first characterized by its scope of application, as, unlike broad-based taxes on consumption (such as value added tax (VAT)) they apply to specific, selective products, such as, alcohol, tobacco and fuel. Excisable products typically cause some negative impacts, for example, on health or the environment or they require long-term national public investment to produce. The excise duty imposed on the product can thus be compared to a sort of “repair cost” for the incidental damages it causes to health, the environment or the public purse.
Another characteristic of excisable products is that the underlying product represents a significant industry, for which revenues and growth should not be drowned by the level of applicable duties. Therefore, despite any philanthropic reason for imposing an excise duty, governments need to find a reasonable balance between the additional cost that the duty represents, and its impact on that industry as a whole. For instance, negative economic impacts on the tobacco industry as well as the cost to public health of tobacco use may be considered by governments, when setting out a tobacco excise duty rate.
These specific characteristics are shared by “grey” taxes (i.e. excise duties on fossil fuels), by green taxes (e.g. taxes on pollution and packaging such as on plastic bags), and by health-related taxes such as taxes on caffeinated or sugary beverages and alcohol.
Another common factor of all these taxes is the public announcements made by governments when they introduce or increase them that they aim to reduce risks whether to health, the environment or the economy. Although, often the only directly measurable effective result may be an increase in government revenue.
What does the global excise duty landscape look like?
In 2016 we conducted a survey of the EY Indirect Tax network about existing and upcoming excise taxes imposed around the world. Our survey shows that 97% of the countries that responded have implemented excises duties on tobacco and alcohol while 78% of them apply excise duties on fuel.
These three products can be seen as the “three pillars” of traditional excise duties. However, they are not the only excisable goods by any means; different countries apply tax to a wide range of different products, including services in some jurisdictions.
In fact, it is striking to observe how excise duties can be used to target very specific sectors or consumer behavior. For example, while Chile applies excise taxes on jewelry and precious stones, Ethiopia does the same on toilet water and Malta imposes excise taxes on chewing gum. This indicates a wide level of local, cultural and historical specificities in the products that are considered to be “harmful” or “indulgent,” perhaps with greater variation than for any other indirect taxes applied around the world.
Specific local rules: agility for governments, confusion for business?
On top of the potential singularity of the type of goods subject to tax, international companies also have to deal with the agility of these taxes and their ability to be modified by governments in relation to their scope, rate or exemptions.
Excise duties have a significant capacity to adapt quickly to evolutions in a market, for instance, with the fast-growing development of e-cigarettes; with effect from 1 January 2017, Finland has introduced a special duty on the liquids used for these alternative cigarettes, irrespective of their nicotine content. As a result, e-cigarettes may be treated very differently in different jurisdictions: taxed as cigarettes in some and exempt from duties in others.
These differences may apply even between countries that are linked otherwise by their indirect tax laws. However, they may also quickly disappear, as domestic legislators may have more freedom to introduce new excise taxes and do not need to wait for international consensus.
However, this lack of harmonization can mean that industries connected to targeted excised activities can face an uncertain regulatory environment, which can add to their compliance burdens and cause difficulties in industrial planning and pricing. Excise duties, therefore, are another key issue in the tax landscape, requiring high levels of local expertise and support. This aspect of local excise taxes can make them particularly difficult for multinational enterprises to manage, as these companies increasingly rely on centralized tax and reporting functions.
The only way is up? Rates just keep rising.
The importance of managing excise taxes effectively is illustrated by the growing financial cost that these duties represent. A consistent increase in excise duty rates is the main trend. The EY survey highlights that 63% of the countries surveyed have raised their excise taxes on alcohol in the past three years; that extends to 84% for tobacco products and 61% for taxes on fuel.
These increases may be partly due to increased evidence of harm to society from these products; however, it may also be that as excisable products tend to have few direct competitors, governments see the high demand for them as an easy way to increase tax revenues without distorting competition.
According to our survey the two main reasons for rate increases and the introduction of new excise taxes is to increase government revenue (56%) and influence consumer behavior (31%).
Sugar and caffeine are the new “sins”
However, clearly some excise taxes, especially those introduced in recent years, are aimed at bringing about positive change.
Our survey shows that in 18% of the countries where special health taxes apply, that those taxes are most likely to apply to high-sugar beverages (e.g. Chile or France), and in 13% of them health taxes apply on caffeine products (such as Panama or Hungary). Generally the main goal of introducing health taxes is to influence consumer’s behavior in order to improve health and reduce obesity. In introducing its consultation process on the planned introduction of a new tax on sugary drinks, the UK government specifically stated that its aim is to reduce consumption of these products.1
After the caffeine duty wave, excise duties on sugared beverages or sweets seem to be a definite trend. Just in the US, states such as California, Colorado or Illinois have introduced a sugar-sweetened beverage tax or are planning to do so, as have cities such as Philadelphia and Oakland. The sugar excise wave has also reached the GCC2 countries which are implementing this type of taxes as they introduce their new indirect tax regimes (including VAT).
In our survey, 80% of the countries that currently have a tax on sugary drinks reported the reason for their introduction was to influence consumer behavior.
Green taxes – saving the planet?
Up until now, environmental or “green” taxes have more commonly been implemented than duties related to health. Environmental taxes are made up of duties related to carbon emissions and climate change (e.g., Japan, Namibia, Russia and Switzerland), and landfill and waste (e.g., Australia, Sweden and US). Of the countries in our survey that have adopted green taxes, 20% have implemented them on packaging (e.g. Iceland, Moldavia and Slovenia). In the past, Australia, Europe and North America was taking the lead on taxes on waste. But Africa is now also taking footsteps towards confronting this environmental challenge. A plastic bag tax already applies in South Africa and is being contemplated in Kenya while the usage of such plastic bags is totally banned in Tanzania.
Most green taxes imposed in the countries we surveyed have increased their rates since their primary introduction and only few countries have decreased rates for these levies. For instance, 70% of the countries surveyed indicated that landfill/waste tax rates have increased since they were first introduced, while 62% of the countries surveyed recognize the same trend for carbon emission taxes and 27% for taxes on packaging. However, the primary aim of these taxes may not be to increase revenue. There is strong evidence that plastic bag taxes, for example, do reduce the number of bags that shoppers use and that are then discarded into the environment.3 In our survey, of the countries that reported that they impose a plastic bag tax, 71% reported the reason for its introduction was to influence consumer behavior.
The future of excise taxes
In these critical economic times, a bright future can be predicted for excise duties globally. Environmental taxes, for example, already represent 6.3% of the tax revenue of the EU4, and that percentage could rise. The impact of excise duty on the world economy therefore – including their impact on producing, distributing and selling all the underlying goods that are subject to tax – is as significant as the challenges that these products themselves present.
As world trade continues to align around trading blocs and free trade, bringing greater uniformity in customs duties and taxes on consumption, excise duties remain local taxes – with their application, rates and rules largely based on each jurisdiction’s main concerns for the environment, the health of its citizens and its revenue goals. The tailor-made excise duty regulations always require local scrutiny as duties are not generally subject to a commonly agreed body of law.
1 Soft Drinks Industry Levy, consultation document, HM Revenue & Customs and HM Treasury, 18 August 2016 at (accessed at www.gov.uk/government/uploads/system/uploads/attachment_data/file/546286/Soft_Drinks_Industry_Levy-consultation.pdf)
2 Gulf Cooperation Council states : Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates
3 Single-use plastic carrier bags charge: data in England for 2015 to 2016, Department for Environment Food & Rural Affairs, 30 July 2016 (accessed at www.gov.uk/government/publications/carrier-bag-charge-summary-of-data-in-england-for-2015-to-2016/single-use-plastic-carrier-bags-charge-data-in-england-for-2015-to-2016
4 Eurostat press statement n° 205/2015 of November 25, 2015 entitled “Environmental taxes in the EU”