Japan: The tax game between the ministry and the brewing industry

The beer industry is braced again for the year-end taxation debate with the fund-thirsty Finance Ministry ready to tap whatever revenue source it can, Asahi news agency posted on November 2. This year, the ministry is playing on differences in each brewer's strength in an attempt to weaken opposition to tax changes.

It is using a carrot and stick approach with a proposal to cut the tax rate for regular beer and raise the rate for popular "third beer" products. The proposed change is being touted as a simplified taxation system.

For the past decade, the beer industry has been on edge almost every year-end as the government and the ruling parties negotiate tax revisions for the following fiscal year. At a news conference in October, Finance Minister Sadakazu Tanigaki said, "Too detailed divisions (in tax rates) restrict economic activities."

The ministry's logic is that brewers are developing new products simply in pursuit of lower taxes. The ministry wants to end the current cycle of raising taxes on products only to see the industry develop a new drink that is not covered by the higher rate.

The liquor tax is divided into 10 categories, further broken down in accordance with the ingredients and production methods. One example is happoshu low-malt beer, which is defined by the ratio of malt content.

The tax game between the ministry and the industry began about 10 years ago when the first happoshu was put on the market. Because of the low malt content, happoshu was taxed at a much lower rate than regular beer. Since lower taxes meant lower prices, the drink was an instant hit.

After the ministry raised happoshu taxes twice, the industry came out with third beer, which has very little or no malt. First was Sapporo Breweries Ltd.'s pea-based Draft One, which debuted last year.

Mostly classified as a "miscellaneous alcoholic drink" for tax purposes, third beer is subject to a tax rate of 19.4 percent, compared with 35.6 percent for beer and 32.4 percent for happoshu. Other brewers soon followed, selling third beer at prices similar to soft drinks.

As lower-tax products gain share, liquor tax revenues decline. In 2004, they totaled 1.6 trillion yen, about three-fourths of the peak year of 1988.

With a growing sense of crisis, the ministry sought a higher third-beer tax last year. It immediately ran into protests from the beer industry as well as consumers and was forced to abandon the plan.

This year, the ministry is proposing to review the whole liquor tax system and simplify it into three or four categories. Within a category, it envisions the same tax rate or only small differences among rates.

The proposal includes a reduction in the beer tax rate, which the ministry hopes will mitigate industry opposition. The industry is suffering from falling sales even with the popularity of cheap third beer.

Shipments of third beer have grown sharply since April, accounting for 18.6 percent of combined beer and near-beer shipments of the top five breweries in September. The industry cites the high cost of developing third beers in its opposition to a tax increase. The product mix, however, is different among brewers.

In the first six months of 2005, beer accounted for 68.6 percent of Asahi Breweries Ltd.'s shipments, compared with 6.9 percent for third beer. But for Sapporo Breweries, the figures were 50 percent and 33.2 percent, respectively. What keeps the industry united despite those differences is their experience with the 2003 tax hike for happoshu, which was raised 10 yen for a 350 ml can.

The ministry told brewers then that consumers would buy more regular beer because of the smaller gap in price. At the end of 2003, however, the top five brewers found that shipments of beer and happoshu combined dropped 6 percent from the previous year.

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