Tax departments in multinational enterprises (MNEs) have an increasing responsibility to monitor changes to excise tax policy in the countries where the company operates.
By monitoring these changes, the tax team can advise their colleagues in the commercial and logistics teams on how to plan for any changes. In the wake of the pandemic, many tax professionals expect excise taxes to increase around the world.
“[Excise taxes] should increase, there’s an inevitability about it because it’s a very good revenue generator,” said Sandy Cochrane, VAT director at Mazars UK.
Tobacco taxes are a particularly attractive option for governments because tobacco is less politically contentious than other goods such as sugar. “There is an acceptance in the population… I guess most countries will raise [tobacco taxes] in the future,” said Bertil Kapff, tax advisor at WTS Germany.
Pakistan is a case in point. The country’s Minister of State for Parliamentary Affairs Ali Muhammad Khan said that the government will increase the federal excise duty (FED) on cigarettes to improve public health and increase government revenues.
However, tobacco levies are not the only taxes that are up for debate. In the UK, a report called the National Food Strategy recently said that the government should introduce a tax on wholesale purchases of sugar and salt by manufacturers. The suggested rate of £3 ($4) per kilogram for sugar and £6 for salt could raise up to £3.4 billion per year, according to the report.
Yet this suggestion was quickly rejected by the food industry and by UK Prime Minister Boris Johnson due to fears about the regressivity of the tax.
Tax professionals including Dan Neidle, partner at Clifford Chance, also raised queries about the design of the sugar levy.
“Good luck defining and enforcing ‘sold for use in processed foods’. Good luck stopping people substituting foreign-made processed foods (not subject to the tax). Good luck stopping people using substitute ingredients, e.g. grape juice instead of sugar,” wrote Neidle on LinkedIn.
Neidle’s comment highlights some concerns about the UK’s proposed sugar tax, including an uncertainty over definitions that could increase the compliance burden and create risks for MNEs.
Despite this hiccough in the UK, excise taxes around the world could increase in the coming years as governments seek to tackle public health, social, and environmental crises that have been emphasised by the pandemic. The environmental tax movement is gaining traction, and the principle of taxing goods based on the harm they cause has been applied to plastic and carbon.
In the US state of Colorado, where cannabis is legal, a public campaign to increase the tax on cannabis from 15% to 20% has reached the secretary of state’s office. This would pay for education stipends for low- and middle-income families.
Meanwhile in the US, the Tobacco Tax Equity Act of 2021 proposes to increase the federal excise tax rate on cigarettes and equalise tax rates for all tobacco products.
Governments may struggle to ensure that the revenue gained from excise taxes is not outweighed by the compliance costs of implementing them. “The biggest problem is that it costs more to implement the tax than the money you earn on it,” said Kapff.
Nevertheless, excise taxes are likely to increase in the coming years, and tax departments are preparing for the changes.
Considerations for MNEs
Tax directors told ITR that tax teams should take a holistic view of changes to excise taxes, to best support their company. “We are advisors for the business regarding pricing strategy, supply chain and logistics,” said Abdelrahman Ali, MEA tax specialist at Mars. “The tax function has to be aware of this news around the clock.”
The most obvious knock-on effect for MNEs is on pricing strategy, but tax teams should also be aware that excise taxes can increase compliance costs.
“Figuring out which product is tax exempt, when you get a reduction, and how to classify all your products in the right way – this is one of the big issues we have,” added Kapff. Tax teams may require additional budget to manage these demands.
Meanwhile, logistics and supply chain teams in the business will require support from the tax function, to ensure that any upcoming excise taxes are factored into contracts.
“[Businesses are] entering into agreements with suppliers that have longevity,” said Cochrane. Suppliers want the security of long-term contracts ranging from three to five years, but this means that any changes in excise taxes during that time could negatively affect the business.
“Whether it’s plastic taxes or sugar taxes, it’s making sure the entire supply chain has accountability,” added Cochrane.
Companies could import products to avoid certain excise taxes, as Neidle suggested. However, tax professionals said that while MNEs adapt to avoid taxes, revenue authorities are becoming increasingly quick to catch up.
“The customs authorities are getting smarter,” said Ali. “They expect that you will buy products cheaper outside… maybe they will be more aggressive, and it might end up that you pay more taxes.”
There are many considerations, but tax professionals told ITR it is important to retain a holistic vision of the company’s actions and how any changes will affect the whole business.
“It’s crucial to look at each country separately. Tax directors always want a resolution in one sentence, but it doesn’t work like this in excise tax,” said Kapff.
“You need to be aware, in every country where you’re selling your product, that there might be a risk,” he added.
With multiple goods categories and countries to monitor, keeping abreast of any changes in excise tax policy could be tricky for MNE tax departments. Yet the tax team’s ability to do so will affect not only the finance department, but also the commercial and logistics divisions of the business.
