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 “gray” 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. Often, however, 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 perfume, 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 are 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 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.