Soft drinks companies and brewers are facing the possibility of higher excise duties on their products as a result of tax reforms proposed by the Finnish Ministry of Finance. Ben Cooper reports. 

In any tax reform there will be winners and losers and, given the traditional Scandinavian approach to alcohol, it is perhaps no surprise that mooted changes to the Finnish tax system are likely to disadvantage alcohol producers. But, reforms likely to be passed after the April general election may well see excise rise on both beer and soft drinks.

Last month, the conclusions of the Finnish Ministry of Finance’s Tax Working Group, chaired by Permanent Under-Secretary Martti Hetemäki, were published.

The central aim of the reforms is to shift the tax burden from income to consumption, with a number of measures put forward, such as increasing VAT, capital gains tax and vehicle and fuel taxes. But, for the food and drinks sector, the most relevant and alarming proposals are the suggested increases in excise on soft drinks, ice cream and confectionery and a 10% increase in alcohol excise duty.

Nothing will happen before the election but the Hetemäki reforms, while they may not be enacted in precisely their current form, are likely to form the basis of inter-party negotiations after the election, as a new coalition agrees its policy agenda for the next four years.

This is the view of Elina Ussa, managing director of the Federation of the Brewing and Soft Drinks Industry. “I believe that the working group has done important work and it will be used as a basis for governmental negotiations.” 

While a report in the Helsingin Sanomat newspaper last month said tax experts in the political parties were “not particularly enthusiastic about the working group's suggestions”, Ussa believes the Hetemäki proposals broadly reflect mainstream political and public opinion. “The mainstream [opinion] is clear. They prefer less taxation on income more on consuming.”

Indeed, according to a survey of 1,027 people conducted in December by Finnish research company Taloustutkimus for the Finnish Broadcasting Company, some 61% of Finns would raise alcohol and tobacco taxes to bolster the public finances, though only 36% would raise excise on confectionery and soft drinks. The three main parties are due to publish their specific tax plans at the beginning of February.

With mainstream public support for shifting the tax burden from income to consumption, and sin taxes always representing an easy option for governments, lobbying for a different approach has proven - and will continue to prove - a stiff challenge for industry advocates.

Last year, soft drinks producers campaigned unsuccessfully against a rise in excise from EUR0.045 to EUR0.075 a litre which came into effect on 1 January. At the same time, excise was extended to confectionery and ice cream.

Interestingly, excise is levied on soft drinks regardless of sugar content. Regular or low-calorie versions are taxed in the same way and even mineral waters are included. “There is no health-based argument for the current tax,” Ussa tells just-drinks. “It is purely fiscal.”

The Hetemäki reform package would see soft drinks excise rise to EUR0.15 per litre, once again regardless of sugar content. The Federation of the Brewing and Soft Drinks Industry has been careful to be positive in its response, and has focused on this anomaly. “Saying ‘no, no, no’ doesn’t get you very far so we’ve been working on the different tax systems we could have,” Ussa explains.

The Federation and two prominent confectionery companies have proposed a sugar tax as an alternative to the excise duty, and this option was included in the Hetemäki report as an idea to be “explored”. However, given that such a measure could result in taxation on many food products not currently subject to excise, the proposal will have limited appeal to the bulk of the food industry. As yet, no political party has publicly supported the proposal.

Excise on beer, meanwhile, would rise by 10% from EUR1.25 per litre to EUR1.38 per litre under the Working Group’s plan. The retail price of beer in Finland – wine and spirits are only sold through monopoly stores – already has a higher tax element than any other EU country and ‘booze cruise’ shopping in Estonia, where beer excise is only EUR0.26 per litre, is already a massive problem for the trade. Excise on beer has been increased three times over the last two years and, so far, no political party has publicly opposed raising it further.

The Federation puts travellers’ imports of beer, cider and pre-mixed cocktails - known in Finland as ‘long drinks’ - at over 40m litres per year. It also warns that Estonia joining the Euro in January will make price comparisons easier and may boost the trade further.

According to Ussa, the last excise hike did not increase retail prices as the rise was absorbed by the trade, with supermarkets using beer as a “traffic builder”, which she believes negates the idea that raising excise makes alcohol less affordable for young and excessive drinkers. In fact, alcohol consumption in Finland is falling. According to the National Supervisory Authority for Welfare and Health (Valvira), average alcohol consumption in 2010 was 10 litres against 10.2 litres in 2009 and 10.5 litres in 2007.

Prices in the on-trade, however, have risen as excise has increased. “This means more people buy their drinks from grocery stores and fewer people go to restaurants which is not a fortunate development,” Ussa adds. Licensed premises now account for only 10% alcohol consumption, according to the Federation, which fears the situation will escalate to the level seen in Sweden where travellers’ imports and the grey market are thought to account for as much as 30% of beer sales.

The suggestion by those critical of the proposed reforms that raising alcohol taxes will boost Estonian alcohol sales and not Finnish tax coffers may not be enough to derail the plans.

As the only Nordic country in the Euro-zone, Finland suffered more during the financial crisis than other Scandinavian economies. The economy contracted by nearly 8% in 2009 and while GDP rallied last year, as in most countries the recovery is fragile. In December, the Government marginally downgraded its growth forecast for 2011 from 3.0% to 2.9%, against growth of 3.7% in the final quarter of 2010. It said the public finances would remain in the red with no prospect of rectifying this in the next few years and increasing taxation was part of the recovery process.

While the problems facing the authorities in Finland mirror those of other nations with developed economies, taxing the populace as a way of pulling out of the downturn is going to be even harder for the Finns, with a cheap option just a boat-ride away.