EXCISE TAXATION POLICY AND PRACTICE

LIZ ALLEN (Drawing on material published by Professor Sijbren

Cnossen)

July 2014

EXCISE TAXATION PRINCIPLES

Excise duties may be broadly defined to include taxes on smoking, drinking, gambling, polluting (including energy consumption), and driving. Their intention is twofold – revenue raising and encouraging behavioural change.

Excise duties are selective and discriminatory in intent.

Excise tax liabilities are often measured quantitatively and enforcement should be subject to physical and accounting controls.

There are usually a comparatively small number of taxpayers – often multinationals providing important amounts of revenue in taxation.

FEATURES OF EXCISE TAXES

Excise duties have, traditionally, been key sources of revenue, because taxable goods are - widely consumed;demand is relatively inelastic;there are few producers (except wine and

beer); there are no readily available substitutes; and administration and compliance costs are low.

COMPARISON WITH VATVAT is a general consumption taxes covering all goods and

services, unless specifically exempted.VAT’s goal is revenue and compliance is controlled through

accounting checks , risk and trend analysis and intelligence.

VAT is a transaction based tax - from the perspective of the buyer, VAT is a tax on the purchase

price from the perspective of the seller, VAT is a tax only on

the value added to a product or service, at each stage in its supply chain. The seller remits to the government the difference between sales or “outputs” and purchases or “inputs”.

Exports are usually relieved of VAT because consumption will take place outside the country. Imports are usually chargeable with VAT at the same rate as domestic products.

Subject to the turnover threshold for registration there will be a very large number of taxpayers to control.

COMPARISON WITH IMPORT DUTIES

Customs duty is levied on the import or export of goods in international trade. A tariff, which is actually a list of commodities along with the leviable rate (amount) of customs duty, is popularly referred to as a customs duty.

Customs duty is calculated on the assessable value in case of items for which the duty is levied ad valorem. For some items e.g. petroleum and alcohol, customs duty is levied at a specific rate applied to the volume of the import or export consignments.

Customs duties are applied to trillions of movements of goods across the world daily and are controlled through risk, intelligence and random selection at borders and through audit based on risk and compliance inland.

Customs duties may apply identically across a Customs Union region.

GOALS OF EXCISE DUTIES

Excise duties are intended to enhance social and market outcomes by improving the allocation of resources.

Excise duties were introduced solely to raise revenue but are now also seen as a key mechanism for influencing behaviour.

CORRECTING EXTERNALITIES (1)Professor Cnossen has explained that:The principle is that rational, informed

individuals should make their own decisions about what to consume and what not, but (external) costs (physical, psychological, or financial) imposed on others should be included in price .

Internalization of external costs induces consumers or users to make optimal decisions from a social point of view, i.e., market outcomes are enhanced (not including external costs implies subsidy).

CORRECTING EXTERNALITIES (2)

Ideally, excises should equal the marginal cost of the damage caused to other people, which is possible if costs are linear in consumption; if costs rise in consumption, average-cost or ‘pooling’ approach (akin to insurance) is second-best option.

The externality concept is unrelated to affordability considerations and does not take account of the impact of illicit trade.

EXCISE TAX STRUCTURES SpecificEstablishes link with externality and transfer

pricing (valuation) issues do not ariseEasier to administer and controlPlaces higher tax burden on low cost

productsMust be revalorised to keep pace with

inflation“Ad Valorem”Difficult to ascertain true values – an avenue

for fraudFavours low cost productsKeeps pace with price changes and inflation

IN PRACTICEDifferent approaches across the world:EU has a combination of specific and “ad

valorem” duties applicable to alcohol and tobacco products. These allow for a very wide range of different tax burdens in EU Member States in practice.

Traditional protection of domestic alcohol industries has led to a wide variation in taxing products according to strength – even in countries with specific based tax structures e.g. Australia, South Africa, Southern Europe (all wine producing countries).

ALCOHOL DUTIES IN AUSTRALIA Australia’s alcohol excise regime may be one

of the most complex in the world, with different rates and rules for different products e.g. the tax on beer differs between bottle and keg sales, brandy is taxed at concessional rates compared to other spirits and wine is treated completely differently.

Excise on alcohol is a traditional source of revenue. Since 1983, when excise changes became linked to movements in the Consumer Price Index, rates have been indexed every six months.

ALCOHOL DUTIES – SOUTH AFRICAThe SA National Treasury discussion paper on the future

taxation of alcoholic beverages in South Africa.South Africa applies an alcohol excise duty rate structure

that differentiates between alcoholic beverage types. The total consumption tax burden – excise duties plus

value added tax – as a percentage of the weighted average retail selling price for wine, beer and spirits is currently set at 23 percent, 35 percent, and 48 percent, respectively.

Appropriate excise tax rates for different types of alcoholic beverages are informed by a combination of factors. To fully 'price' the external costs of alcohol abuse, excise duties on alcoholic beverages would need to increase significantly.

TOBACCO TAXATION - EUCouncil Directive 2011/64/EU of 21 June

2011:defines the various categories of manufactured

tobacco (cigarettes, fine cut tobacco intended for the rolling of cigarettes, cigars and cigarillos, other smoking tobacco);

lays down the general principles governing taxation of manufactured tobacco;

provides for an overall minimum excise duty of 57% of the weighted average retail selling price of cigarettes;

provides for a minimum amount of excise duty of 64 Euro per 1000 cigarettes irrespective of the weighted average retail selling price;

TOBACCO TAXATION –EU (cont.)

determines the minimum rates for fine-cut smoking tobacco intended for the rolling of cigarettes, namely 40% of the weighted average retail selling price or 40 Euro per kilogram;

determines the minimum rates for cigars and cigarillos, namely 5% of the retail selling price inclusive of all taxes or 12 Euro per 100 items or per kilogram; and

determines the minimum rates for other smoking tobaccos, namely 20% of the retail selling price inclusive of all taxes, or 22 Euro per kilogram.

COMPARISON OF CIGARETTE PRICES IN THE EU (http://www.the-tma.org.uk/

INDIRECT TAX BURDEN ON ALCOHOL AND CIGARETTES – SADC MEMBER STATES – 2010

SOUTH AFRICA CONSULTATION ON ALCOHOL DUTIES

It is recognized that higher excise rates may exacerbate social problems arising from excessive alcohol consumption as heavy drinkers turn to cheaper, or illicit, alcoholic beverages.

The proposals should be seen as part of a larger package of measures to address problems associated with alcohol consumption and should look at the overall effectiveness of the alcohol excise tax regime, the costs and complexity of tax administration and compliance, and the potential impact on the economy and on illicit trade when deciding on reform of the current excise tax regime for alcoholic beverages.

The consultation considers whether a uniform tax based on alcohol content, rather than by product type, should be considered.

EXCISES ON LUXURY GOODS

Excises on luxury goods not advocated:taxable base is very small; progressivity is negligible and should be

promoted through the income tax (which is paid by the rich who buy luxury goods) and VAT which is levied on the selling price at each stage; and

administration (ad valorem rate) is problematic.

TAX THEORY – RELATIONSHIP BETWEEN IMPORT DUTIES/EXCISE/VAT

Professor Cnossen explains that:The protectionist function of import duties takes

precedence over the externality-correcting function of the excises, which take precedence over the revenue-raising function of the VAT.

This implies that;import duties should be imposed on the c.i.f.

value of imports;excise duties should be imposed on the import-

duty inclusive value of imports; and VATs should be imposed on the import- and

excise-duty inclusive value of imports.

REFERENCE MATERIALTheory and Practice of Excise Taxation: Smoking, Drinking,

Gambling, Polluting, and Driving, Oxford: Oxford University Press, 2005

Excise Tax Policy and Administration in Southern African Countries, Pretoria: UNISA Press, 2006

Taxation and Regulation of Smoking, Drinking, and Gambling in the European Union, FinanzArchiv 64/4, 2008

Excise Taxation in Australia, ch. 10 in Australia’s Future Tax and Transfer Policy Conference (Henry Tax Review), Melbourne: University of Melbourne, 2010; reworked as The Economics of Excise Taxation, ch. 7 in E. Albi and J. Martinez-Vasques (eds.), The Elgar Guide to Tax Systems, London: Edward Elgar Publishing, 2011

THANK YOU