Consumption/ sales taxes
The IMF issued a report on Japan’s economic position on 31 July 2017 following the conclusion of discussions under Article IV of the IMF’s articles of association.
The report notes that Japan’s economy is growing above potential with positive private consumption growth and stronger private investment. There are however labor shortages, weak wage growth and persistently low inflation. The IMF expects the growth to continue through 2017 but to fall back in 2018 if the fiscal stimulus support decreases as currently planned.
The IMF directors consider that the current favorable environment provides an opportunity to go ahead with a comprehensive reform package to sustain growth, raise inflation and deal with the medium term challenges including fiscal consolidation and increasing potential growth.
A selected issues paper published at the same time as the report looks at tax policy challenges of an aging and declining population. This notes that the consumption tax should remain the main part of revenue reform but that the timing of rate increases is important. Other potential tax measures should also be examined.
The consumption tax is an important policy owing to the size of the public debt and the need for more health and social security spending for the ageing population. Although expenditure reform is also required Japan will need additional revenue. The consumption tax rate is currently low relative to other industrialized countries and there is therefore room for raising the tax rate. Also the efficiency of collection of the consumption tax is high so more revenue can be raised with low collection costs. Raising the consumption tax rate is likely to be less detrimental to economic growth than other tax options. A gradual increase each year would reduce any volatility of the impact on growth. The IMF is therefore proposing gradual increases to the consumption tax as part of a broader fiscal adjustment package.
Other potential tax measures
Other taxes such as a tighter personal income tax, property tax, inheritance tax or asset and wealth tax could also be examined to supplement the revenue gains that can be earned from the consumption tax increase.
Personal income tax
Tightening the personal income tax would contribute to revenue growth. The top rate of personal income tax is currently one of the highest in the OECD but reforms could focus on addressing inequality and eliminating disincentives to work. The low collection level of the tax indicates that there are a large number of deductions and these enable the higher earners to obtain benefits. The deductions could be replaced with more progressive measures such as targeted tax credits.
This could be linked to other reforms such as eliminating disincentives to full-time or regular work resulting from the operation of the spousal tax deduction. Exemptions for pension income could be reduced and targeted tax credits for elderly workers could increase incentives for them to remain in the labor market.
In Japan only 30% of local tax revenue is raised from recurrent property tax, compared with 100% in the UK and Australia, 90% in Canada and 75% in the US. Raising property taxes would provide a more stable revenue base for local governments and reduce the level of transfers from the center. This could encourage growth and raise revenue as property tax is the most efficient tax.
Asset or wealth tax
Only a few countries currently use wealth taxes and one important motivation for them has been as a temporary measure in a broader fiscal consolidation. Countries that scrapped their wealth taxes cited high administrative costs compared to revenue collected and problems of capital flight as reasons for its discontinuance. Generally a wealth tax is best structured with very few exemptions, a high threshold of liability and a flat marginal rate set at a low level.
As part of the Budget for 2016 the UK government announced a new levy on soft drinks companies from April 2018. The Soft Drinks Industry Levy is to be charged on producers and importers of soft drinks that contain added sugar where the total sugar content is 5 grams or more per 100 ml. A higher rate of levy is to apply to drinks with 8 grams or more per 100 ml. The tax will not apply to drinks where no sugar is added; or to alcoholic drinks with alcohol content above 0.5% ABV that cannot be lawfully sold in a shop to under-18s.
The UK government has stated that the levy differs from a consumption tax as it is explicitly aimed at encouraging producers to bring down the sugar content in their products, reduce portion sizes and help customers choose low sugar and sugar-free brands.
Scope of the levy
The levy is to apply to UK producers and UK importers of soft drinks with added sugar including imports from EU countries. There will be a relief or exemption for the smallest operators or for low volumes of production or imports. The levy is to commence from April 2018. The legislation will define the sugars that if added to products will bring them within the scope of the levy.
The levy will be applied to liquids on the basis of their ready-to-drink composition. Pre-packaged cordials, squashes and syrups that are diluted for drinking will be taxed by reference to their composition at the recommended diluted volumes. This would also apply to the pre-packaged ‘bag in box’ syrups that may be purchased by pubs and restaurants for dilution on the premises before serving.
The liability for the levy would arise at the point of production or importation if the product is not to be used in any further manufacturing. For UK-based production this is likely to be the point at which the product is packaged. For imports the levy would become due when the products are imported into the UK, however products such as syrups imported for use in commercial manufacturing processes would not be taxed when they enter the UK because the final soft drink product will be taxed at a later point.
The legislation would include an exemption for the smallest operators, to balance the administrative costs of HMRC against the revenue collected by enforcing the levy below the threshold. One option is to exclude small importers and small producers from the levy if the volume imported or produced is below a certain level. If exceeding that level they would become liable for the levy on all production or imports.
Alternatively a universal relief could be provided on the first portion of liable products, so a certain volume of products would be disregarded each year on a rolling twelve month basis, or the relief could take the form of a specified annual exempt amount expressed in pounds sterling.
Producers and importers liable for the tax would be required to register with HMRC from 2018. They would be required to report information on their taxable products and pay their tax liability on a quarterly basis. Businesses producing or importing less than the threshold would need to monitor their production volumes. These businesses would be required to register if they are expected to go above the threshold within a rolling twelve month period.
Producers or importers would also be able to deregister if they no longer trade in or produce added sugar soft drinks, or if they fall under the threshold for a certain period of time.
Businesses would be required to test the sugar content of their products on at least an annual basis to demonstrate that the sugar content in the products corresponds to the levels declared on the product packaging. The results of the testing would be kept as part of the business records. HMRC is considering a requirement for this testing to be undertaken by an independent party and is asking for comments on this from interested parties.
Enforcement powers are also likely to include the authority to require producers of dilutable cordials to pay the levy at a standard dilution ratio if HMRC considers the dilution ratio has been set to avoid the levy. Dilution ratios will be monitored to ensure that producers are not changing the stated dilution ratio just to avoid the levy, without changing the product.