Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 1 |1 | Lessons learned from worldwide experience on tobacco taxes Anne-Marie Perucic Economist Tobacco Control Economics Tobacco Free Initiative

Global overview

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 3 |3 | Average Price of the Most Sold Brand & Excise Tax per pack, and Total Tax Share By Income Group 2010 Source: WHO GTCR III

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 4 |4 | Excise system on cigarettes Number of countries 182Total covered 51Specific excise only 54Ad valorem excise only 56Mixture of both excises 20No Excise Note: the countries sum up to 181, the 182 nd country is Bhutan where sale is banned so no local consumption tax is applied Source: WHO GTCR III

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 5 |5 | Average price and excise tax by tax structure, 2010 Average excise PPPAverage price PPPExcise tax structure Specific only Ad valorem only Mix system Relying more on specific Relying more on ad valorem Source: WHO GTCR III

Specific or ad valorem excise tax?

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 7 |7 | Specific versus ad valorem Specific excise is applied as a monetary value per quantity (weight, pack, etc): – Easy to administrate as only production/import volumes need to be known. – Reduces incentive for consumers to trade-down to cheaper products. – But needs to be adjusted regularly to reflect inflation and to ensure that income growth do not make he product more affordable. Ad valorem excise is applied as a percentage of the value of the product: – Earns more revenue from premium brands and self-adjusts for inflation. – Is a disincentive to product upgrades that make products more appealing. – But is susceptible to undervaluation of the tax base and transfer pricing when base is CIF or ex-factory price. – And is more likely to lead to consumer substitution to cheaper brands

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 8 |8 | Mixed excise systems Mixed systems have both a specific and an ad valorem component to them. The specific component can act as a "floor" or minimum amount that is paid by cheapest brands in the market. Mixed systems embody the benefits of both tax types: –Specific component reduces under-valuation by cheap brands and incentives for consumers to trade-down. –Ad valorem component earns revenue from premium brands and reduces incentive for producers to upgrade. But they are also more complex to implement and require a high level of technical and administrative capacity.

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 9 |9 | Some common strategies The short-term goal is often to shift from tiered to uniform excise system (and this shift alone can generate significantly more excise revenue). For countries with no excise tax or relying more on import duties: move away from import duties to rely on excise duties. Medium-term strategies will vary depending on admin capacity, supporting legislation, market conditions, and policy objectives: –Specific is easier to administrate as avoids the valuation problem. –Specific narrows price gaps by effecting cheapest products the most. –Ad valorem generates more revenue from premium segment of the market. The long-term goal is to continue increasing tobacco tax rates in order that: –Affordability continues to decrease especially for the youth population. –Excise revenue levels are maintained/increase even as consumption declines.

Lessons learned

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 11 | Problems faced by developing countries Weak tax administration: –Weak capacity to collect revenues and audit industry –Weak smuggling control Technically weak tax technocrats Limited knowledge about the market Almost no knowledge about existing types of excises, their strengths and weaknesses Frequent turnover among officials Best source of information to MoF on what and how to tax: Tobacco manufacturers.

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 12 | Problems faced by countries: other issues –Little commitment from the Government –Conflict of interest within government –Strong industry pressure –Little evidence on economic impact of tobacco use and tobacco control (opportunity for industry to use such arguments against tobacco control and tax increases).

Country examples

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 14 | Implementing well-designed tax policies Egypt Egypt moved from a multi rate tax system into a single mix system in July 2010: –Eight different rates used to apply on cigarettes based on their price level opportunities for the industry to avoid taxes by making sure they would fall under a lower price segment –Egypt now applies one ad valorem rate and one specific rate on all types of cigarettes The ad valorem rate is imposed on the retail price (easier to administer than if rate was imposed on producer price because the producer price is difficult to assess). –The 2010 tax change led to an increase in the average price of 44% and an increase in revenues by more than double.

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 15 | Increasing taxes regularly Ukraine Increased their taxes seven times from 2008 and 2012: –The specific rate increase from 14 to UAH per 1,000 pieces –Ad valorem increased from 12.5% to 25% of the retail price The average price increased four-fold (from 2.64 to 8.19 UAH) Cigarette production and real tobacco excise revenues in Ukraine Source: Krasovsky 2012

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 16 | Moving away from reliance on import duties Brunei Used to levy 200% CIF tariff on cigarette imports –After 2007, replaced the specific import duty with a specific excise –As Brunei does not manufacture any cigarettes, there is no real effect on economy - only a need for administrative adjustment to importers In 2010 the Government also banned the import by travelers of duty free cigarettes.

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 17 | Monitoring local tobacco production Turkey Sophisticated automated system of monitoring production in place since 2007: –Stamps are imposed on tobacco products at the manufacturing level and go through monitoring scanners placed in production facilities, –Scanners provide real time information directly to the Ministry of Finance about brand manufacture, quantity and production location, –Costly system but neither the government nor the companies pay, instead cost spread over quantity produced over 5 years => TL0.06 per pack of cigarettes)

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 18 | Specific example of a country (unnamed) complex tax system & lack of tech. capacity of admins Ministry of Finance increased tax rates during fiscal years and Industry reacted to ensure revenue objectives were not met: –Under production –Brand repositioning Revenues in were lower (also due to major flooding during this period) At the same time, new team in place without proper training on tobacco tax issues => Industry succeeded in pushing for a reduced tax in

Regional Seminar: Tobacco prices and taxes, and Illicit trade of tobacco products | July 2012, Panama City 19 | Conclusions Best Practices Rely more on excise taxes than on import duties, Rely more on specific tobacco excises, and remember Simpler is better –=> easier tax administration, reduction of incentives for tobacco tax avoidance and tax evasion, reduces incentives to substitute among tobacco products/brands, Strengthen administration: –Strengthen capacity of tax officials to make the best tax decisions for the government benefit and counter industry arguments, –Monitor production and trade to guarantee higher revenues.