Consumption tax: a tax revenue or a specific purpose?

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From 1 January, soft drinks, fruit juices and non-alcoholic beer prices increased. At the same time, the tax on these drinks has been increased. This tax is called 'consumption tax'. Last year, the tax on non-alcoholic drinks was 9 cents per litre, whereas this year, it has increased to 26 cents. In this way, the government is trying to encourage people to choose a healthier alternative. But is such an extra tax on (sugary) non-alcoholic drinks permissible or effective? Ilona van den Eijnde, researcher at Erasmus School of Law, discusses the conditions surrounding imposing extra taxes. 

Excise duties on alcohol and tobacco, for example, and value-added tax (VAT), are largely regulated and partially harmonised at EU level. Partly because the purpose of this directive is (partial) harmonisation, it also stipulates that member states may not simply take all kinds of additional measures on taxes similar to excise duties or VAT.

Imposing additional tax must serve a purpose

Van den Eijnde explains that if the Netherlands wants to (additionally) tax a product while the Excise Directive already covers that product, it is only allowed if the product is not exempt from taxation under the Excise Directive. "An example of a supply exempt from excise duty is the supply of fuel to the armed forces of a member state or NATO. So the Netherlands cannot unilaterally decide to levy a national tax on that anyway."

If the product is not exempt based on the excise directive, the possibilities to levy additional tax domestically are still limited. The excise directive then requires that Union principles be respected and that the tax serve a specific purpose. "What exactly should be understood by a specific purpose is not further defined, but established case law gives us guidance." In this regard, Van den Eijnde cites two court cases. The first court case is an Austrian municipal 'terrace tax'. The tax involved an additional tax on ice cream and alcoholic and non-alcoholic beverages to finance tourism-related costs. According to the European Court of Justice, this tax did not serve a specific purpose but rather a budgetary purpose, i.e. tax revenue. According to the European Court of Justice, a budgetary objective is, by definition, not a specific objective. The second court case concerned the issue in which the French government collected additional taxes on high alcoholic (over 25%) products to provide additional funding for the national health fund. According to the European Court of Justice, this additional tax did serve a specific purpose: additional protection of human health. 

Other conditions for non-taxed products 

For example, if the Netherlands wants to tax a product not covered by the excise directive, such as (sugary) non-alcoholic beverages, different rules apply. Van den Eijnde: "So it is always important to establish exactly what a domestic tax taxes and only where appropriate why." Unlike products that are not exempt under the Excise Directive, the specific purpose for a tax on non-alcoholic beverages does not matter at all. Instead, two other conditions apply: the tax should not have the character of a turnover tax, and the tax should not give rise to formalities at the border.

Is consumption tax a sales tax?

Van den Eijnde explains that opinions are divided in case law and literature on what exactly qualifies as a sales tax. "In my opinion, the terms sales tax and value-added tax are not interchangeable, but a value-added tax is a differentiation or form of a sales tax. Nevertheless, they seem to be used interchangeably in case law and literature." The European Court of Justice ruled that a turnover tax has four main characteristics: a general tax on consumption, proportional to the price of a good or service, levied in every chain of the production process regardless of the number of transactions, and of value-added only. "It follows from case law that most taxes that do not qualify as sales taxes do not meet the first requirement because they are on specific rather than virtually all goods and services. As far as I am concerned, this would also apply to a tax on (sugary) non-alcoholic beverages", Van den Eijnde adds.

Formalities at the border

Besides not having the character of a turnover tax, the tax should also not give rise to formalities at the border. There is also plenty of case law on this second condition. However, in the cases submitted so far, the European Court of Justice has ruled that there are no such formalities and, therefore, the tax is allowed. That includes filing a tax return or providing a guarantee of the tax to be paid. "In any case, real border controls similar to those applicable at the external borders of the European Union are not allowed."

Van Eijnde provides an interim conclusion: "A tax on (sugary) non-alcoholic beverages can meet the conditions set out in EU directives."

Is consumption tax against the law?

However, the fact that (sugary) non-alcoholic beverages can meet the conditions set out in EU directives does not take away from the fact that a domestic tax must also comply with other principles arising from primary Union law or the World Trade Organisation. For example, it follows from the European Convention on Human Rights, specifically Article 1 of the First Protocol, that everyone has the right to undisturbed personal property. Van den Eijnde explains that taxes, by definition, violate this principle. "This is allowed, but within the reasonable range: the principle of proportionality." Case law from the hand of the European Court of Human Rights shows, for example, that a tax rate must not be confiscatory or exorbitant and must not impose an "excessive and individual" burden. "A consumption tax will not easily be confiscatory, but exorbitant or excessively individual are conceivable positions when it comes to a tax on non-alcoholic beverages, especially after the increase in rates from 1 January 2024." The Dutch consumption tax has so far only been tested by the Supreme Court on whether or not it gives rise to border formalities (and it does not, according to the Supreme Court). The new rate structure, which taxes similar sugary drinks differently, could exceed the 20% to 30% tax, possibly even the 98% tax. However, a 98% rate was previously deemed by the European Court of Human Rights to be contrary to Article 1 of the First Protocol. That case concerned a Hungarian taxation of 98% on a severance payment insofar as it exceeded a certain (low) threshold amount. The court considered this an excessive interference in the right to the undisturbed enjoyment of property.

Producer behaviour 

"For companies affected by the increased tariffs, I expect a range of different, possible reactions", Van den Eijnde explains. She explains that you can think of price increases for products that fall within the levy, price increases of (comparable) products that fall within as well as outside the levy, lower margins for products that fall within the levy but for which the elasticity does not allow for further price increases, additional investments in production innovation to adjust recipes and thus be able to fall under an exemption, and attempts to raise the issue - either through the courts or through public relations - of the proportionality of the new tariff structure.

Price incentives

Consumers' reactions to these products will greatly depend on the route chosen by producers/companies. According to van den Eijnde, it is far too easy to say that consumers will buy less of the taxed product or - even easier - consume less sugar in the event of a tax increase. She indicates that consumers' reactions will strongly depend on the actual price incentive issued and the extent to which alternative products are available.

What does consumption tax yield?

Van den Eijnde: "In that respect, human behaviour is complicated to capture in economic formulas about demand, supply and price elasticity. Therefore, it can be questioned whether the indirect nature of an indirect tax is the best way of inducing behavioural change at all, at least as long as there is no legal obligation to pass on the cost to consumers in the prices of the actual taxed product." If that is not the case, then the consumption tax can be considered a pure budgetary measure. While that is permissible - the specific purpose is only required for an additional tax on products already taxed at EU level - it is, van de Eijnde points out, questionable whether it passes the tests of effectiveness and efficiency. "Also considering relatively high implementation costs and if the behavioural change is apparently irrelevant anyway - does a (half) per cent extra VAT, income tax or even corporate tax not yield much more?"

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