Introduction
Several Member States have taxed or want to tax soft drinks with added sugar. They are one of the causes of obesity without having any nutritional value. The problem is how to tax the sugary drinks without the tax being considered as State aid for the drinks that are not taxed. A recent measure implemented by Finland provides guidance on both what to do and, as I explain at the end of this article, what not to do [See Commission decision SA.104131].[1]
Soft drinks have for some time been subject to taxation in Finland. Last year the framework for taxing soft drinks was revised. The new tax has a two-fold purpose: To raise revenue for the state and to incentivise consumers to switch to less sugary drinks.
The new tax defines the scope of the tax by listing the products which are subject to the tax, rather than by setting out an abstract description of the taxed products.
Certain products are excluded from the tax: e.g. unflavoured plant-based drinks as, for example, soya-based beverages; drinks with alcohol contents of less than 1.2%; coffee, tea and cocoa; soft drinks used in the manufacture of soft drinks; soft drinks used as a raw material in the industrial production of other foodstuffs; soft drinks used in the manufacture of medicinal products; soft drinks delivered by an authorised warehouse for consumption outside Finland, but within the EU.
The new tax is quite progressive. The previous two rates of tax have been increased to six rates according to sugar content. They start at EUR 0.20 per litre for soft drinks without sugar and rise to EUR 0.59 per litre for drinks with more than 11 grams of sugar per 100 ml, regardless whether the sugar occurs naturally or is added. Drinks with sweeteners are not taxed at higher rates.
The taxable persons are the producers of soft drink in Finland, and the importers of the drinks from outside Finland. The tax becomes chargeable when the products are sold for consumption by the manufacturers or importers. However, producers and importers with an annual volume that does not exceed 70,000 litres are also exempted. For those small producers and importers that are also independent of other bigger producers or importers, respectively, of soft drinks, Finland will ensure that any benefits will not breach the threshold of EUR 300,000 of de minimis aid per three-year period [in the worst case scenario, the forgone tax revenue would be EUR 0.59 x 70,000 x 3 = EUR 123,900].
The view of Finland was that the new tax did not constitute State aid for the non-taxed drinks and was notified to the Commission for purposes of legal certainty. The assessment of the Commission hinged on whether the tax conferred a selective advantage to non-taxed drinks.
Assessment of selectivity
The Commission applied the established three-step test: identification of the reference system, identification of derogation, possible justification of any derogation.
The reference system
“(55) The Commission notes that the New Soft Drinks Tax is not part of a wider tax system but is a self-standing tax. It pursues its own logic and it is independent and distinct from any other tax regime applied in Finland. Moreover, it has its own tax base, tax rates and taxable event. The Commission therefore concludes, in line with the position advocated by Finland that, in the present case, the reference system is confined to the New Soft Drinks Tax.”
Then, the Commission noted a complication. “(61) The interplay of these two objectives [i.e. to raise revenue and to combat obesity] is a peculiar feature of the New Soft Drinks Tax. The health objective to reduce sugar consumption is essentially relevant for the application of the higher tax bands, which are applicable to soft drinks containing added or naturally occurring sugar. The progressivity of the higher tax bands thus depends on the sugar content of the soft drink. By contrast, the health objective to reduce sugar consumption is not directly relevant for the application of the lowest tax band, which is applicable to sugar-free beverages that can be classified as “soft drinks”. Therefore, for the application of the lowest tax band, the only relevant objective to take into consideration is the fiscal objective of raising revenue for the Member State by taxing the consumption of a specific category of products (soft drinks). In other words, what is relevant is not the sugar content of the product, but the fact that a product is a soft drink.”
For the purpose of combating obesity, it is fairly easy to differentiate objectively between soft drinks with high sugar content. But for the purpose of raising revenue, it is not so easy to justify the taxation of zero-sugar soft drinks but the non-taxation of other non-sugary drinks. Furthermore, “(62) the Commission notes that certain products are expressly exempted from the New Soft Drinks Tax by Article 4 of the New Soft Drinks Tax Act, even if they qualify as “soft drinks” within the meaning of Article 2(1) of the New Soft Drinks Tax Act.”
Therefore, the Commission decided to “(63) assess in the sections below:
(i) whether the New Soft Drinks Tax has been designed in a consistent way and the essential characteristics of the tax do not lead to manifest discriminations in light of the objectives pursued by that tax. In particular, the Commission will review:
− whether the definition of the scope of products covered by the New Soft Drinks Tax is clearly arbitrary and/or manifestly discriminatory in light notably of the objective to raise revenues for the State through the taxation of the consumption of a specific category of products, namely soft drinks; and
− whether the progressivity of the tax and the exclusion of certain products from the higher tax bands are clearly arbitrary and/or manifestly discriminatory, in light notably of the health objective of the reference system;
(ii) whether exemptions of certain soft drinks constitute derogations to the reference system. In particular, the Commission will review whether soft drinks expressly exempted from the New Soft Drinks Tax pursuant to Article 4 of the New Soft Drinks Tax Act are in a comparable situation to those subject to it, in light notably of the fiscal objective of the reference system (i.e. to raise revenue for the Member State through the taxation of the consumption of a specific category of products, namely soft drinks), and hence whether such exemptions are prima facie selective; and
(iii) for those exemptions that are prima facie selective, the Commission will assess whether they are justified by the nature or the general scheme of the reference system”.
Whether the reference system is consistent and non-discriminatory
First, the Commission noted, in paragraph 66 of the decision, the exclusion of certain products from the tax on the ground that they were not “soft drinks”:
- unflavoured milk;
- unflavoured plant-based milk;
- drinks with alcohol content higher than 1.2% and beers with an alcohol content over 0.5%;
- products listed in Article 1 of the new soft drinks tax act:
- foods for specific groups for which specific provisions are laid down in EU legislation (i.e. clinical food, infant formulae, baby foods, foods for weight control);
- food supplements;
- medicinal products;
- coffee, tea, cocoa powder and hot beverages made therefrom.
With respect to unflavoured milk and plant-based milk, the Commission accepted that they are not soft drinks because of their high nutritional value and contribution to human development. Indeed the Commission has found, in the context of merger assessment, that milk and soft drinks are not in the same relevant market.
Alcoholic drinks are exempted in order to prevent their double taxation as they are already subject to excise tax on alcohol. Moreover, alcoholic products are generally not viewed by consumers as a substitute for soft drinks.
The products listed in Annex 1 of the new tax act are not soft drinks even if they are in a liquid form. They have special properties and are used for specific purposes.
With respect to coffee, tea, cocoa and hot beverages, the Commission accepted that they cannot be consumed directly, they need to be prepared through a certain process. The Commission considered that they are objectively different from soft drinks.
Whether the progressivity of the tax is manifestly discriminatory
The Commission, first, noted that “(107) the public health objective of the levy is reflected in its progressive structure and in particular in the higher tax bands.” Then it added that “(108) the progressivity of the tax rates could potentially entail a selective advantage for producers of soft drinks with a lower amount of sugar compared to those having a higher amount of sugar, if this leads to a reduction in the amount of tax which would normally have been payable by the recipient of the measure if that recipient had been subject to the ‘normal’ tax system applicable to other taxpayers in the same situation.”
However, there is no “normal” tax to be applied to soft drinks other than the tax in question because the soft drinks tax is the reference system [paragraphs 55 & 112 of Commission decision]. The Commission also recalled that, “(113) as the Court of Justice has held, outside the spheres in which EU tax law has been harmonised, the determination of the characteristics constituting each tax falls within the discretion of the Member States, in accordance with their fiscal autonomy, that discretion having, in any event, to be exercised in accordance with EU law. This includes the choice of tax rate, which may be proportional or progressive, and also the determination of the basis of assessment and the taxable event.” [On this point see the landmark judgment in case C-562/19 P, Commission v Poland, paragraph 38.]
Therefore, the Commission concluded that “(114) progressivity appears to be in line with the public health objective of the reference system, consisting in reducing sugar consumption in the population and redirecting the consumption and production of soft drinks towards soft drinks that contain less sugar. Imposing higher tax rates for products containing more sugar is coherent with this objective.”
Assessment of products explicitly exempted from the soft drinks tax
Next, the Commission turned its attention to the following exempted products:
- soft drinks used in the manufacture of soft drinks
- soft drinks used as a raw material in the industrial production of other foodstuffs
- soft drinks used in the manufacture of medicinal products
- soft drinks used for the production of alcoholic beverages
- soft drinks used in the manufacture of. baby foods
- soft drinks delivered by an authorised warehouse for consumption outside Finland.
The exemption appeared to be prima facie discriminatory. However, the Commission considered that they were justifiable as they “(131) are either not prima-facie selective because the relevant products are not in a comparable factual and legal situation as products subject to the tax, in light of the objectives of the reference system or that the exemptions are justified by the logic of the tax system”. Those products are not consumed but are used as inputs into manufacturing processes [the objective of the tax is to penalise the consumption of sugary drinks]. The exemption of soft drinks consumed outside Finland is justified by the logic of the tax system because the tax is chargeable when the drinks are sold for consumption which is not the case when they are exported outside Finland.
Conclusion: The Finnish case as an example of what to do and what not to do
The Commission concluded that the new soft drinks tax did not constitute a State aid measure in favour of drinks excluded from its scope or of drinks subject to lower rates of taxation. The exclusion of certain drinks was objectively justified primarily on the grounds that they were not “soft drinks”. The drinks that were subject to lower tax rates did not receive aid because Member States are free to levy progressive taxes according to the criterion of their choice.
The complexity of the Commission’s assessment also suggests that Finland designed an unnecessarily complex measure. It was too complex for two reasons. First, it had two objectives: to raise revenue and to penalise sugary drinks according to their sugar contents. Second, it had a very broad definition of soft drinks which required too many exceptions. Given the fact that all taxes, whatever the purpose, generate revenue, Finland could have chosen to simply levy the tax according to the sugar context starting with a rate of zero for drinks with no or little sugar or with naturally occurring sugar [such as fruit juices]. The drinks that cause obesity are the ones with added sugar. The exempted drinks hardly had added sugar. Therefore, Finland could have achieved both of its objectives at a lower risk of a negative Commission decision by relying on a tax with progressive rates linked to the amount of added sugar.
[1] The full text of the Commission decision can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/202523/SA_104131_117.pdf
