Japanese beer tax reform could turn market upside down

Japan plans a unified tax rate on beer and beer-like drinks which would replace the existing taxing system on malt content and could therefore turn the Japanese beer market upside down.

Currently beer in Japan is taxed according to the amount of malt, which is used to brew the product. This has created a unique beer market with low-malt and no-malt beer not existent in any other beer markets in the world. The new tax system, which might be part of a fiscal 2017 tax reform, will become effective in fiscal 2018 at the earliest and be fully implemented over five to 10 years. As a consequence, this reform  will most likely eliminate happoshu low-malt beer and dai-san (third category) no-malt beer. “We will draw a conclusion this year on the future schedule to (unify the tax rates) in stages and state (it) in the tax law,” Yoichi Miyazawa, Japan’s minister of economy, trade and industry, said in an interview with Kyodo News.

The current system of liquor taxation dates back to 1953 with major revisions in 1962 and 1989, and minor revisions over the past decade. Beer is defined in Japan as a fermented beverage containing at least two-thirds of malted barley. Since the 1989 tax reform beer is highly taxed with 77 yen ($0,7) per 350 milliliter can.

In order to circumvent this tax, Japanese brewer Suntory started selling a 65-percent malt brew called Hop’s Draft in 1994, which was by definition not a beer anymore and invented a new category called happoshu (“bubbling spirits"). This was done by substituting malt by other ingredients like rice or corn. Initially happoshu was only taxed at 18.6% whereas beer stayed at a 45.5% tax rate.

Soon other Japanese brewers introduced similar products and the much cheaper happoshu could heavily cannibalize traditional beers. Japanese tax authorities discovered  the legal loophole and raised in 2006 tax on happoshu with more than 50% malt to the same level as beer. For happoshu with less than 50% malt, the tax was also raised but only to 28.9%. In 2003, in a second step, tax on happosho was again increased to 35.5%, which already came close to traditional beer.

Again Sapporo was the forerunner with a new product launched in 2003 called Draft One which did not use any malt, barley or wheat at all. This was the start of a new product category called dai-san (third category), with a major tax advantage over beer and happoshu. In 2008 sales of dai-san beer overtook those of happoshu for the first time and in 2011 the market share of dai-san was already 35%, leaving only 50% for traditional beer and 15% for happoshu.

It seems that the Japanese government and ruling parties realized now that the only way to stop this race for lower taxes is by implementing a totally new taxing system for beer and beer-like products.

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