Old World Countries Fashion a New Market’s Taxes

By Calin Coman-Enescu, Director of Capital Markets, New Frontier Data

Having addressed Europe’s changing regulatory landscape regarding CBD and hemp products, it is worthwhile for industry stakeholders to review the new taxes and changes to tax codes. Currently, the U.S. government is projected to collect nearly $20 Billion in federal tax revenue between 2018 and 2025. Across the pond, regulators in some of the new old-world markets are approaching taxation in innovative ways, with various impacts on the growing market.

At the heart of Europe lies ever-neutral Switzerland, who last year in characteristic Swiss fashion decided to tax the sale of hemp flower at 25%, the same as for tobacco sales. That smokables are smokables and will be treated the same was essentially the court’s lawfully neutral view, with a twist that suppliers will pay the tax on their forecasted monthly sales. The ruling has caused headaches for smaller businesses finding themselves unable to comply.

Across the English Channel, a similar ruling in Ireland saw CBD sales becoming subject to the standard 23% value-added tax (VAT), causing an uproar among CBD retailers. On reflection, it may provide a better outcome than it first appeared: The Irish Department of Finance has clarified that the ruling was a result of CBD being classified by the government as a food supplement. The policy arguably makes Ireland one of the most progressive among European nations, as it de facto overrules the EU’s Novel Foods regulations stipulating that CBD cannot be marketed as food or a food supplement without authorization.

Meanwhile in Poland, puzzling rules mean that CBD oil is taxed as food but must be labelled as non-edible. While food products containing CBD are subject to EU novel food guidance, CBD oils fall under the same 5% tax scheme as cooking oils and margarines (as a result of Poland’s complicated tax rules). Interestingly, CBD oils thus actually benefit from a reduced VAT rate, below that of prescription medical cannabis products taxed at the standard VAT rate of 23%.

Perhaps Europe can look to the Netherlands for guidance as it transitions to legal markets. As a general rule, income tax there is payable even on profits made from illegal activities. Therefore – despite the sale of cannabis in coffeeshops being technically illegal (though tolerated), the retailers pay tax on the profits they make, as well as wage taxes and social security premiums for their employees. Often the income tax rate applicable to coffeeshops is 52%, while corporate tax rates range from 20% to 25% by comparison. Statistics Netherlands (CBS)estimated the turnover of coffeeshops “conservatively”  at €600 million for 2017, and believe the profit margins to have been 100%, putting the tax revenue at approximately €156 million. Similarly, tax revenue from cannabis producers in the Netherlands is estimated at €100 million, bringing the total figure up to €256 million. Such totals would represent more than enough to cover government costs in policing soft drugs (beyond cannabis alone), an effort estimated at €107 million in 2011.

So, despite changing rules and tax codes, it seems that even if a product remains illegal, a sustainable market can be developed once the dust settles. Companies which survive by correctly navigating such changes will be poised to grow and fill the gaps left by those which fail. Meantime, tolerance (rather than outright bans which foster illicit markets) allows a government to reap substantial tax revenues as it addresses the challenge of enacting long-term policies for regulating the product, a phenomenon which may inspire other countries throughout Europe.

For more information about cannabis taxes, join New Frontier Data and CohnReznick for the InterCannAlliance in Berlin this April 2.