Mikael Bonde Nielsen is the Director of Economic Affairs at Coca‑Cola Public Policy Center, Europe, Middle East and Africa. Mikael Bonde Nielsen spoke about tax reform agenda, as well as sugar tax and soft drink tax in general.
What does tax reform agenda imply globally? What are the driving principals for similar reforms?
-Over the past 20 years we have seen an interest in different types of excise taxes including sugar taxes. In fact, those are discriminatory taxes; you single out a set of products and then you tax them. If you don’t do it broad-based, the result has proven to be in the form of unstable revenue. If you only tax that single category, you will easily see a drop in consumption. The revenue will go down quite fast, because it is linked with taxation and prices in general. Consumers usually respond quite significantly to tax and price increases. This is also the case when you tax soft drinks. The governments think that the consumers don’t respond to these changes, but they actually do. They actually don’t get the revenue that they expect. And the second reason is that sometimes these taxes are coupled with ambition to correct behavior among consumers. They see a drop in consumption, and start to think that it will actually change the behavior of the consumers. But that’s not necessarily true, as consumers are just substituting that product with another one.
Are they migrating from soft drinks to another product that is less taxed?
-It all depends on what kind of products we are talking about. If they chase a high-calorie less-taxed product, then you have gained absolutely nothing from a health perspective. So that is the trend that the governments have got offering sugar taxes, for instance. But they haven’t received the expected payoff when it comes to revenue or health improvements.
How do you think will the excise tax introduction influence health agenda? Will people still consume as much sugar as they do today?
-There will be a drop in consumption of soft drink, if you introduce a tax and increase the price. The key here is that you cannot translate a drop in consumption into an improvement of health, because a lot of things are going on in between. The consumers need to take an active decision. However, they are not necessarily doing that.
Currently, we don’t see this transmission mechanism between soft drinks and a better choice, which is very complicated. Consumers will most likely continue to consume sugar in another form. In the past 20-30 years, we have seen a drop in consumption of sugar, but obesity has increased at the same time. Therefore, we also see some paradoxes, and Australia is a very good example in this context.
This implies that obesity is a much more complex issue and just trying to reduce the intake of a specific nutrient like sugar will not help tackling it, as there are other sources that contribute to obesity.
What is the Armenian government doing from a macroeconomic perspective?
-I think they are taking the right steps, as their objectives are right. They want to promote the growth-enhancing economy to create a more prosperous society. The way to do that is actually very much in line with what they are doing now to reduce the taxes on productive labor. We are not challenging the government’s objectives because they are good and they are sound. What we are challenging is more than specific solutions. We are against discriminatory taxes, since they don’t deliver on the health outcomes. We prefer a more broad-based approach that would prevent consumers from substituting.
I think it’s important to say that we actually appreciate that the Armenian government takes time to reflect on this issue and is actually open for a dialogue. Sometimes the governments just go ahead without reflecting on what they are doing and without listening to the industry and the consumers, while that’s not the case here. That should be appreciated, as this approach gives us an opportunity to come up with a better solution in collaboration. It’s not about instigating some new taxes and then three years down the road see that the solution isn’t giving revenues and it’s not improving health in the country.
A better solution would be to engage with the industry and discuss reformulation and portion control, because that is what really can change consumer behavior significantly.
Some policymakers would argue that taxes work for other sectors, which means that they will work in case of soft drinks as well. But there is a difference between pollution, for example, and obesity. While we have taxes on pollution, there is no tax on obesity. An incentive is offered for every industry to reduce pollution. Still, we cannot instigate attacks on obesity; we can’t go out and tax individuals for being obese or overweight.
Instead we are trying to find a proxy for obesity and that proxy is then sugar. I mentioned Australia, where you can actually see a decrease in sugar consumption but an increase in obesity. So sugar is not necessarily a good proxy.
As a global player, what can you bring to the table to support the government and industry in driving constructive collaboration?
-We can bring the experience we have from quite many markets, and that is one hundred and thirty plus something years of experience. In the old days when a soft drink tax was introduced, it was a sin tax or a luxury tax. Now the governments are moving into more corrective taxes. They want to change consumer behavior with taxes.
We have that experience from many countries where they tried that with a disciplined resolve. I think that we have gained some insights on that, and it’s important for us to say we are not against taxes. We are paying a lot of taxes here in Armenia. According to KPMG Socio- Economic Impact Study for 2015 to 2017, total GVA contribution, economic contribution was AMD 29.5 billion, total payments to the state budget - AMD 15.6 billion․ I think if it’s the direct revenue to the state, so we are paying in total 0.5 % taxes generated to the state budget.
We simply challenge bad taxes, and we think that a discriminatory and selective tax on soft drinks is a negative experience, since it will disappoint the government on revenue and on the health perspective as well.