Brewery Companies & Sin Taxes - The Debate
Its that time of the year as the brewery and cigarette companies (BCCs) make their public relations rounds to spread the news against any sin taxes in the upcoming budget.There were no sin taxes last year. Following the windfall taxes being imposed on CPO companies and IPPs, it’s only natural for BCCs to make their case known before the upcoming Budget is finalised. Recently, in The Star’s business section, breweries in Malaysia cautioned that another round of excise duty hike could result in more smuggling and increased competition from wine, spirits and hard liquor. The article also highlighted that excise duty rates in Malaysia is already the highest in Asia and second highest in the world, after Norway (and I thought we were only tops in car prices).
The Defence
The sector contributes some RM1.24bil in excise duties, corporate taxes and personal income taxes.
It provides direct employment to over 1,000 full-time employees and more than 60,000 people through indirect employment where the industry provides businesses through distributors, packaging, materials suppliers, transporters, retail outlets, media and advertising.
They have been models of good corporate citizenry.
The industry has raised approximately RM500mil in CSR initiatives over the last two decades to help the community. It supports tourist-related activities such as the Rainforest Music Festival in Sarawak and KL Food and Fashion Fest, including the KL Fashion Week and the Malaysian International Gourmet Festival.
It includes public events to view sports-related programmes such as EPL and Euro football matches.
Victim of commodity upcycle
Like other industries, the brewery industry is already faced with rising costs as a result of the recent fuel price hike, electricity tariffs, commodity prices and rising inflation.
Additionally, costs of key raw ingredients, which include malt, hops and barley, have risen by between 50% and 150% in the last two years.
Packaging, materials and services costs have increased by RM40mil a year. Between 2004 and 2006, consumption of tax-paid beer fell by 14%.
Malaysia has the lowest consumption of beer per capita in the region. Industry growth is almost flat today which means that it took the industry five years just to get to flat growth.
As it stands, excise duty on beer in Malaysia is currently the second highest in the world (after Norway) and highest in Asia.
The price of beer and stout in Malaysia is one of the highest in the region. The industry witnessed three consecutive years of duty hikes from 2004-2006, totalling 50% (there was no duty increase from 2007-2008.)
Declining sales?
Any further increase in excise duty will be offset by continued decline in sales volume, thus Government does not gain any higher revenue. Using the consumption forecast model, when excise duties increase, beer and stout consumption will decline between 6.5% and 20.8% respectively.
If duty increases, Government stands to lose between RM6.2mil to RM29.3mil net income due to the lower sales volume.
The government had already increased the excise duty consecutively from 2004 to 2006, with a stupendous 27% hike in 2006.
Hence, any further increase in excise duty will result in demand destruction and net negative tax collection revenue to government coffers. Between 1997 and 2007, per capita consumption of beer had fallen whenever excise duty was raised.
While the drinking population in Malaysia (non-Muslims aged 20+) has increased from 3.9 million in 1990 to 6.2 million in 2007, per capita consumption has dropped from 30.1 litres to 19.9 litres. When excise duty is raised, the resultant effect is that more people will switch to illegitimate alcoholic products and compounded hard liquor, which is priced lower but has up to eight times higher alcohol content.
Smuggling activity
The Government loses RM217,000 in unpaid duty for each smuggled container of beer/stout. The industry estimates that some 150 containers of smuggled beer/stout escape duty every month and this translates to a revenue loss of about RM400mil per annum. To curb smuggling, the Government introduced tax stamps on every imported can/bottle to show that duty has been paid.
However, stricter enforcement is required as consumers can still buy imported beer, which is easily available at supermarkets, mini markets and sundry shops at below the value of the duties.
Various brands of cheap imported beer, with an alcohol content of 8% to 12%, are retailing at these places at only RM5 per can. Realising the huge potential of tourism, Hong Kong cut duty on beer and stout from 40% to 0% in the last two years. It has proven to be a boon to tourism. Let’s not forget that tourism plays a key role in the growth of the Malaysian economy.
The flip side
There are two sides to every story. Despite having the second highest excise duty in the world; despite retail prices being among the highest in Asia; despite the demand destruction cited, the Malaysian breweries are still making decent money.
Guinness Anchor is still paying 9.5% dividend yield and has an excellent ROE of 21.5%. Carlsberg (M) is paying 10.4% dividend yield and has a ROE of 19.7%.
Compare that with Asia Pacific Brewery (Tiger Beer) which pays a paltry 2.3% dividend yield and has a ROE of 15.4%. Fosters pays a dividend yield of 5% and has a ROE of 16.5%.
Tsingtao Brewery pays a dividend yield of just 1.5% and has a ROE of 14.9%. Anheuser Busch pays a dividend yield of 2.1% and has a ROE of 80.4%. Kirin Brewery pays a dividend yield of 1.5% and a ROE of 10%.
That said, the strong dividend policies for these two Malaysian companies is largely driven by the government policies.
Most profits are repatriated back to holding companies as investment in growth is pretty limited considering the current Malaysian political landscape.
These companies can’t use the profits to fund growth regionally because of the strict Malaysian policies. By right, Guinness Anchor and Carlsberg (M) could have been the platform to invest into other operations in Asia.
These two companies if treated like other companies, would have tripled their market capitalisation over the last 10 years if the dividends were reinvested. But who would do that with the aggressive excise tax hikes?
Hence both companies are mainly dividend plays when they could have been so much more.
Many will say sin taxes are good for the economy. You may punish these companies to a certain extent as these are not necessarily desirable products (including gaming and cigarettes). You may even say there are additional costs to society due to people consuming these products (drink-driving, smoking related diseases, etc.) However, we live in a society where we should respect others’ lifestyles, even when we do not agree.
The additional social and medical costs is a good counter argument but these products are not illegal. In the same way, I would consider luxury brand items as frivolous and a waste of resources. But can we tax these products 200% or 500%? Where do we draw the line?
Government officials need to sit down with these industry players and think of ways to encourage investment rather than repatriation of profits. That is a lot of opportunity cost to the nation.
Similarly, for gaming companies, where extremely high taxes have opened a huge market for illegal bookmakers in 4D draws and horse betting. It is commonly perceived that the turnover for illegal 4D and horse betting is about 20x-30x the actual turnover at legal counters. JUst working together to reclaim 20% of the illegal activity would have boosted tax collection 100% to 200% more!
Global practice has proven that where taxes for gaming is low, it automatically curbs the “spread” of illegal bookmakers.
Bottom line – the government ought to work more closely with these companies with the aim of promoting efficiency and maximising tax collection for the overall economic and social well being of the nation. The failure to engage these companies will mean creating a huge underground and illegal economy for the country.
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