Miyakodayori 52

Bad tax, bad beer

October 25, 2002

The major breweries in Japan are campaigning against the proposed tax raise on happoshu ( www.happoshu.com ). Happoshu ("sparkling alcoholic beverage") is a unique beverage in Japan that looks and tastes like beer but is substantially cheaper. The Government is trying to raise the tax on happoshu to a level equivalent to beer, but those breweries that have invested heavily in the development, production and marketing of happoshu are strongly opposed to this move.

Why was happoshu invented in Japan? The answer is its unique tax structure on alcoholic malt beverages:

Liquor tax on alcoholic malt beverages (yen per kiloliter)
Malt content Before 1996 Since 1996
Beer 67% or more 222,000 222,000
Happoshu Between 50% and 67% 152,700 222,000
Between 25% and 50% 152,700 152,700
Less than 25% 83,300 105,000

In October 1994, Suntory started marketing happoshu with malt content of 65%. This was followed by Sapporo, with its happoshu of less than 25% malt content. Both products had lower price tags due to the low liquor tax. The tax authorities were quick to react. In 1996, they raised the liquor tax as indicated in the table above, but under the current tax scheme, a substantial difference still exists between tax on beer and tax on happoshu, particularly on the "less than 25% malt content" variety. Seeing that there is demand for cheap beer-like beverages, major breweries like Kirin and Asahi soon started producing happoshu of their own. Many people switched from beer to happoshu because a can of beer typically costs 220yen while the same-sized can of happoshu can be bought at 130yen. Now the share of happoshu in the combined market of beer and happoshu is almost 40%.

On its face, there is nothing wrong with this development - a producer discovers a niche market and starts selling new products. Nevertheless, I think it is problematic at least on two counts. First, happoshu tastes awful. Second, tax discrimination between beer and happoshu violates the rules of the World Trade Organization.

It is quite natural that happoshu tastes awful. With less than 25% malt content, it is impossible to replicate the full flavor of beer. In order to offset this, breweries are applying all kinds of production techniques including the use of such exotic substances as non-fermented barley extract and desalinated deep-sea water. The result is very artificial flavor, with funny (sometimes sweet, sometimes bitter, depending on brands) aftertastes. You might say, "If you are so particular about the taste of beer, drink regular beer. Don't drink happoshu." That's exactly what I do, but many other people have switched to happoshu and the resulting deflationary pressure has damaged the business of microbreweries, which do not have enough resources to invest in happoshu (or even if they had, they would be too proud to engage in such a dirty business). Some of them (such as Ginga Kogen Beer, known for its range of German-style beers) have already filed for bankruptcy. As a beer lover, I lament this massacre of microbreweries. We will no longer be able to enjoy the variety of beer produced in Japan.

More seriously, tax discrimination between like products are against the rules of the WTO. Article III:2 of the General Agreement on Tariffs and Trade says: "The products of the territory of any Member imported into the territory of any other Member shall not be subject, directly or indirectly, to internal taxes or any other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products." There is no question that beer and happoshu are like products. To the extent that imported beer is subject to tax in excess of those applied to domestically produced happoshu, it is inconsistent with the WTO rules. (The happoshu campaign Website argues that happoshu is not a like product of beer, but their argument is not persuasive at all. It suggests, though, the campaigners are aware of this WTO rule.) This is a lesson the Japanese tax authorities bitterly learned in the 1997 WTO case of Japan - Taxes on Alcoholic Beverages, in which the panel ruled that tax discrimination between shochu and vodka was illegal.

The tax authorities are right in their move to equalize the level of taxation between beer and happoshu. The major breweries opposed to this are wrong. Their argument that happoshu is a totally new product might have been more persuasive if there had been a net increase in the combined market of beer and happoshu, but in reality, happoshu merely substituted some of the beer market. Beer and happoshu should be taxed equally. Of course, the tax authorities could decide to lower the tax rate on beer to the level equal to happoshu, but such a decision is extremely unlikely in view of the current budget crisis. In any case, as a beer drinker, I see no problem with a tax hike on happoshu-I don't drink it anyway!

Author and Editor-in-Chief, Ichiro Araki
Director of Research
Research Institute of Economy, Trade and Industry (RIETI)
e-mail: araki-ichiro@rieti.g.jp
tel: 03-3501-8248 fax: 03-3501-8416

RIETI invites you to visit its English website
[ http://www.rieti.go.jp/en/index.html ].

The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).

October 25, 2002