1. 5/13/2011
Designing and Enforcing Tobacco Excises: The IMF Experience __________________________
Patrick Petit and Janos Nagy
Senior economists
Fiscal Affairs Department, International Monetary Fund
TOBACCO TAXATION: WIN-WIN FOR PUBLIC HEALTH &DOMESTIC RESOURCES MOBILIZATION CONFERENCE
APRIL 18 – 19, 2017
WASHINGTON, DC, USA

2. 5/13/2011
Revenue Mobilization and the IMF: A strong and multi-faceted commitment
Support SDGs and Addis Ababa Action Agenda to strengthen tax systems in developing countries
Policy work (including for the Board)
Strengthened collaboration with other IOs
Joint IMF/WB initiative on Domestic Resource Mobilization and Taxation Interagency Task Force on Financing Development
Platform for Collaboration on Tax (IMF, OECD, UN, World Bank)
Scaling up of technical assistance: currently to over 100 countries annually (HQ and regional centers)
Assessment of existing taxes and their potential: Income taxes, VAT, excises, customs, non-tax, etc.
Many TA recommendations become part of country’s reform programs and end up in IMF conditionality
Going forward, overall potential is estimated to range between 2-4 percent of GDP

3. 5/13/2011
Technical assistance and tobacco excises (1) Is there a revenue potential?
Tobacco excises: generally a small share of revenues
…But 35 Tax Policy TA reports discussed tobacco taxes in the past 5 years
Europe: highest median, minimum, and maximum
Africa: lowest median – Only 3 of 24 countries above 0.35% of GDP (Mauritius, Madagascar, Seychelles)
Calculation of tax potential needs to take into account administrative capacity and local conditions

4. 5/13/2011
Technical assistance and tobacco excises (2) Main objectives and considerations
Main policy objectives
Realize the full short term revenue potential, given local administrative / enforcement capacity
Take health considerations into account, which are compatible with revenue objectives: win-win
Possible long term tension if revenue decline…but presumably growth in other revenues will offset this decline
Main considerations for revenue setting
Level of tax: Importance of comparing with neighbors because of base erosion due to smuggling
Composition of taxes: specific (amount per quantity) vs. ad valorem (percentage of value)
Specific taxes: easier to manage / compatible with health objectives / more stable revenue …but must be adjusted on a regular basis (automatic adjustments procedure could be in the excise law)
Ad valorem: takes inflation into account
Administrative capacity and structures

5. Tax policy (1) How high should excises be?
5/13/2011
Tax policy (1) How high should excises be?
What is the « level » of tobacco taxes?
Absolute level of excises? Including/excluding VAT? Share of excises in price?
What is the benchmark?
Importance of international comparisons crucial need for data
Overall revenue policy and the price elasticity of demand
The role of excises in overall revenue policy, and the impact of IMF programs
Tobacco consumption, the price-elasticity and the current level of tobacco excises are key determinants of the revenue potential
Administrative considerations
The higher the taxes, the stronger controls should be (see next section)
Historical & current patterns of illicit trade

6. Tax policy (2) The composition of tobacco excises
5/13/2011
Tax policy (2) The composition of tobacco excises
The powerful impact of the multiplier effect…
Ad valorem taxes Specific taxes
…And its relative irrelevance in the presence of limited capacity
Health considerations & administrative ease  specific taxes
Inflation & protection for local low-quality cigarettes  ad valorem taxes

7. Tax policy (3) Earmarking & overall recent experience
5/13/2011
Tax policy (3) Earmarking & overall recent experience
Earmarking
Budget rigidity/fungibility of resources & lack of broad and systematic evidence that objectives are met (Bird & Jun, 2005; Bird, 2015; WHO, 2016)
Fragmented collection, managerial difficulties with extra-budgetary funds (Allen and Radev, 2010)
Preference for “Soft” earmarking: political commitment to (1) increase taxes and (2) fund specific initiatives, but with no budget / institutional / accounting link between the two
Our recent experience with tobacco taxes
Our member countries are overwhelmingly supportive of tax increases
General preference for specific taxes, which means a need for frequent adjustments
Strong concern for illicit trade among member countries
Weak tax administration
Preference for a gradual/simultaneous approach to tax increase and capacity building

8. Tax Administration issues (1)
5/13/2011
Tax Administration issues (1)
Higher tax wedge, low compliance level and ineffective enforcement incentivizes illicit trade/production…How to address this?
1. A strong legal framework
Clear definitions in legislation - for products (e.g., cigarillos vs. cigars), tax base, rates, point of tax collection (factory? warehouse? point of import?), exemptions (travelers), etc.
Identification of responsibilities: Which level of government, which agency does what?

9. Tax Administration issues (2)
5/13/2011
Tax Administration issues (2)
Specialized excise administration and enforcement/audit services
within the Revenue Administration
Administration focusing on early stages with minimum number of players
Empowerment of tax/excise/customs administration, Special financial and administrative guarantees
Licenses for all operators, record-keeping, marking systems, management of supplies (warehouses, transit procedures, etc.), restrictions on out-of-network sales (internet, duty-free shops, etc.),

10. Tax Administration issues (3)
5/13/2011
Tax Administration issues (3)
Trained, experienced and dedicated staff
Information gathering and analysis, intelligence, Cooperation with other agencies
Well-equipped enforcement teams; Mobile patrols at bottlenecks

11. Tax Administration issues (4)
5/13/2011
Tax Administration issues (4)
Illicit operators always aim for the weakest point in the tax administration  Overall progress in revenue administration sets a limit to improving control of the tobacco supply chain
Adequate levels of penalties, administrative and criminal sanctions for illegal activities
Administrative and criminal investigation capacities: Increase deterrence and reduce incentives (criminalization of excise fraud – investigation, seizure and confiscation of proceeds of crime – push the threshold higher!)

12. Challenges going forward
5/13/2011
Challenges going forward
Regional / international policy coordination: more to be done
WAEMU/ECOWAS, Eastern + Southern Africa, EU, GCC, etc.
International cooperation in detecting and repressing tobacco fraud
Implementing the Protocol to Eliminate Illicit Trade in Tobacco Products
Track & Tracing system: good idea, but significant capacity constraints
What are intermediary steps?

13. 5/13/2011
Where to from here?
Policy / tax admin. principles clear from the IMF’s perspective, and reflected in “How to” note
Tobacco will continue to be a convenient “top-up” source of revenue, above VAT
Potential to raise more in many countries
However, more attention needs to be paid to administrative capacity building
Implementation issues are likely to gain in importance if/when Illicit trade protocol is implemented:
A “perfect system” unlikely when Tax Administration systems are weak
Need for realistic timeline and intermediary steps
International coordination issues to become increasingly important
IMF will continue to build capacity and support international coordination through its TA

14. 5/13/2011
Thank you