1. Opportunities and threats of the excise tax harmonization in the EU – Latvia’s approach Māris Jurušs Deputy Director Tax Policy Department Ministry of Finance of Latvia 20.09.2006 PRAGUE

2. The main requirements of EU The minimum excise tax rate: 57% of the most popular price category (MPPC) and not less then EUR 64 per 1000 cigarettes Combined excise tax rate: specific + ad valorem. The ad valorem rate is applied on retail price Equal excise tax rate for all cigarettes Fixing of maximum retail price (MRP) Minimum tax (optional)

3. Retail Price Structure (EU directives)

4. Harmonisation of excise tax on cigarettes in Latvia with EU requirements 1st step: 01.01.1999 Introduction of general EU requirements (tax warehouses, suspended tax payment procedure, guarantees etc). 2nd step: 2001 - 2003 Introduction of equal excise tax rates. Introduction of combined tax rate. Introduction of MRP system. 3rd step: 2003 - 2010 Gradual increase of excise tax rate to the minimum EU level: 57% of MPPC and not less then EUR 64 per 1000 cigarettes.

5. GDP per Capita in EU, 2004

6. Minutes worked to purchase 20 cigarettes

7. Harmonization of excise tax with EU requirements

8. Currently established annual increase of excise tax on cigarettes 2006 2007200820092010 Specific rate, 7,6 (10,92) 8,4 (12,07) 9,3 (13,36) 10,5 (15,08) 17,8 (25,57) LVL (EUR) per 1000 cigarettes Ad valorem, % of MRP 14,8 19,223,527,932,2

9. Expected MPPC

10. Opportunities of the harmonization of the excise tax in Latvia Fiscal aspects: –yearly excise duty revenue increase: in 2004: 20 Milo. EUR in 2005: 30 Milo. EUR in the first half of 2006: 18 Milo. EUR about 90 -100 Milo. EUR in 2010 –more option for budget programmes Social / health aspects: –decreasing of consumption –decreasing of smoking

11. Threats of the harmonization of the excise tax in Latvia Smuggling –in 2005 arrested 7,36 Milo. units of cigarettes and 24,4 tons of tobacco; –in the first half of 2006 arrested 18,93 Milo. units of cigarettes; Alternative products to cigarettes (smoking tobacco) Excise tax rates in neighbouring countries –in Russia: 0,046 EUR per 20 cig.+8% (or 5-7 times less than in Latvia) –in Belarus: 0,036 EUR per 20 cig. (or 9 times less than in Latvia) Inflation –in 2005: 6,7% ( 0,28 pp from tobacco products) –in the first half of 2006: 6,3% (0,21 pp from tobacco products)

12. Changes in exchange rate of national currency - lats (LVL) 2002 – 2005

13. Excise tax harmonization

14. Excise tax harmonization Option 1

15. Excise tax harmonization Option 2

16. Further harmonization of the excise tax – Latvia’s approach Depends on: –Economical situation –Inflation rate –Situation in market –Smuggling activities Further activities: –Report to the government –Negotiation with the Commission

17. Thank you for your attention!