Excise Taxation in the European Union. Emil M. Sunley Asian Tax Forum Workshop November 9-10, 2009 Bangkok

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1 Excise Taxation in the European Union Emil M. Sunley Asian Tax Forum Workshop November 9-10, 2009 Bangkok

2 Overview Preliminary issues The structure of excises Free trade areas and customs unions Harmonization of taxes EU experience

3 Excise: Specific or Ad Valorem Specific excises based on quantity (per liter for beer and wine; per liter of pure alcohol or per degree of alcohol for distilled spirits) All OECD countries except Korea and Mexico impose specific excises on alcoholic beverages Ad valorem excises based on value (usually the ex factory value or the retail value)

4 Current Alcohol Excise Structures across the Asia-Pacific A comparison of alcohol excise structures in the OECD, to excise structures in the Asia- Pacific

5 Case for Ad Valorem Excise on Alcoholic Beverages Can be imposed on the ex-factory or retail price Ex-factory common when state monopoly Retail price could be the maximum price set by the manufacturer A uniform ad valorem excise will not distort t relative prices; a 40 percent excise will increase the price of cheap and expensive alcoholic beverages by the same percentage amount

6 The Case for a Specific Excise on Alcoholic beverages Levied on the thing to be discouraged the amount of alcohol consumed Tax revenue does not fluctuate with the exchange rate or pricing variables Easier to administer than ad valorem excises Lower price differentials between high and low price drinks, and thus reduces brand switching Beer vs. wine vs. distilled spirits Specific excises need to be adjusted for inflation

7 Inflation Adjustment for Specific Excises Inflation adjustments should be automatic; i.e., by an administrative order and not require a decision by an executive agency or approval by a legislative body Australia and New Zealand have automatic ti inflation adjustments based on the change in the CPI Australia: every February and August New Zealand: every December

8 Free trade agreements (FTAs) Tariffs eliminated on most goods traded between member states No common external tariff Need rules of origin; goods that do not meet minimum origin requirements not eligible for FTA s preferential tariff rates

9 Customs Unions Common external tariff Internal trade free of customs duties Goods valued at point of first entry Fiscal controls at borders between member states may be abolished Tax and duty free sales for passengers between member states may be abolished

10 Harmonization of Taxes Highest priority harmonization of taxes on business income and investment incentives Harmonization of excises important (for governments) due to cross border shopping, smuggling and downward pressure on rates Harmonization of VAT less important

11 Harmonization of Alcohol Excises A Difficult Road 1972 EC s initial proposals to harmonize excises 1987 EC proposed a single, Community rate for each product (beer, wine, & spirits) fixed as an average of existing rates 1989 EC proposed minimum and target rates (long- term convergence) 1992 Minimum rates adopted; only compromise possible given national circumstances, cultures, and traditions No adjustment in minimum rates since 1992

12 EU Minimum i Specific Rates Beer: EUR per 100 liters per degree Plato or 1.87EUR per 100 liters per degree alcohol of finished product Wine: 0 EUR per 100 liters Spirits: 550 EUR per 100 liters of pure alcohol

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15 EU Reduced Rates for Small Producers Beer Independent small breweries annual production limited to 20 million liters Rate must be at least 50% of standard national rate Spirits it Small distilleries annual production limited to 1,000 liters of pure alcohol Rate must be at least 50% of standard national rate

16 Independent d Small Breweries Must be legally and economically independent of any other brewery Must use premises physically apart from any other brewery Does not operate under license Where two or more small breweries cooperate and their combined annual production does not exceed 20 million liters, they may be treated as a single independent small brewery Council Directive 92/83/EEC of 19 Oct 1992

17 Small Distilleries i Must be legally and economically independent of any other distillery Does not operate under license Council Directive 92/83/EEC of 19 Oct 1992

18 EU Cigarettes: A Mixed System Must impose both a specific and ad valorem excise a compromise Total excise burden 57% of MPPC Total excise must be at least 64 EUR/000 Specific excise between 5% and 55% of the total tax burden (excise + VAT) States may impose a minimum specific excise

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21 EU Border controls EC regulates the production, storage and movement between Member States of excise products Border controls removed in 1992 Bootlegging increased; UK government resisted lowering excise rates Belgium reduced its rates on beer and wine in 1992 to bring them more in line with the rates in Germany Finland reduced d its rates in 2004 ahead of the accession of Estonia

22 EU Movement of Excisable Goods between States Currently a paper document, the Administrative Accompanying Document (AAD) used for movement of goods; can only export tax and duty free if shipping to a registered trader Excise Movement and Control System (EMCS) will replace AAD. Real time tracking of movements of goods trader to trader Hugely costly Not much help on bootlegging (the smuggling of alcohol purchased in low-tax jurisdictions)

23 East Africa Community Common external tariff Excises not harmonized MOF officials consult each year on excise rates before budget speeches are delivered

24 Some Implications for ASEAN Harmonization of alcohol excises will be difficult to achieve given wide differences in the level of income among member states May be a role for a minimum excise in ad valorem systems Strengthen tax and customs administration, collaboration between different authorities within countries, and collaboration between countries Enter into MOUs with companies