Economics of tobacco taxation Excise tax implementation ... · Economics of tobacco taxation Excise tax implementation, arguments &facts By Ayda A. Yurekli, ... •2009 China, Egypt,

Economics of tobacco taxation Excise tax implementation, arguments &facts

By Ayda A. Yurekli, PhD

Coordinator, TCE Tobacco Free Initiative

World Health Organization

WHO FCTC Conference of Parties, Seoul, South Korea November 2012

Worldwide Tobacco Tax Application

Three Main Areas

– Examples of Tax Implementation & Administration

– Persistent & New arguments against tax increases

Worldwide Tobacco Tax Application Implementation of taxes

Type of Tax • Specific • Ad valorem • Mixture of both

• Application • Uniform • Tier - differential

– By characteristics of products

• Tax Base • Producer price • Wholesale price • Retail price • A made-up value

Excise system on cigarettes Number of countries

182 Total covered

51 Specific excise only

54 Ad valorem excise only

56 Mixture of both excises

20 No Excise

Note: the countries sum up to 181, the 182nd country is Bhutan where sale is banned so no local consumption tax is applied

Source: WHO GTCR III 2011

Public health policy: Tax-induced higher prices. Average price and excise tax by tax structure, 2010

Average excise PPP Average price PPP Excise tax structure

1.78 4.51 Specific only

0.77 2.38 Ad valorem only

2.17 3.81 Mix system

2.54 4.42 Relying more on specific

1.91 3.40 Relying more on ad valorem

Source: WHO GTCR III 2011

Close Technical Engagement between WHO & MoF

• 2009 China, Egypt, Pakistan (2), Turkey, • 2010 Bangladesh (2), Vietnam, Mexico • 2011 Ghana, India, Indonesia, Thailand • 2012 Cambodia, Fiji, Indonesia, Kazakhstan, Kenya,

Russia, Philippines, Samoa, Senegal, Ukraine, Uganda, Tonga, Zambia.

Worldwide Tobacco Tax Application Administration of taxation

SIMPLER IS BETTER

• Easy administration • Reduced tax-avoidance

practices • Transparency for better

compliance

SIMPLER IS BETTER Egypt 2010

2010 Mix Excise System

Mixture of Excise Ad valorem: 40% of R. Price Specific: EP1.25/pack

1.25 40%

Price

Tax Net of tax price per

pack of GST/pack

less than 65 P.T. 108 P.T more than 65 to 73 P.T 112 P.T more than 73 to 84 P.T. 125 P.T. more than 84 to 95 P.T. 140 P.T. more than 95 to 106 P.T. 153 P.T. more than 106 to 300

P.T 175 P.T.

more than 300 to 425 P.T.

315 P.T.

more than 425 P.T. 325 P.T.

2009 Tier Excise System

Source: WHO and Ministry of Finance (MoF) Egypt 2010

SIMPLER IS BETTER Kenya 2010

2011 Advalorem with specific floor

Ksh 1200

35%

Price

Tax Description

Rate/1000 sticks of cigarettes)

Plain Cigarettes or cigarettes of RSP of less than Kshs 2500 700 Soft Cap Cigarettes of more than 2500 but not more than Kshs 3500 1000 Soft Cap Cigarettes of more than 3500 but not more than Kshs 4500 1500

Hinge lid cigarettes or cigarettes of RSP of more than 4500 2500

2010 Tier Excise System

Source: WHO and Ministry of Finance (MoF) Kenya 2011

Indonesia's Successful On-going Efforts Reducing its complex system to simpler system

TYPE OF OBACCO STRATA

Market share in total market

Average price in

2011/piece

EXCISE RATE

FY 2010 & 11

EXCISE RATE FY

2011& 12

Expected % increase

in retail price**

16% 711 325 355 5.2% 23% 675 315 345 5.4% I 5% 618 295 325 5.9%

3% 596 245 270 5.1% 3% 442 210 6.9%

Machine made

kreteks SKM

II

16% 395

170 235

20.2%

6% 816 235 255 3.0% 11% 577 180 3.2% I

2% 540 155 195

9.1%

1% 417 110 125 4.4% 1% 362 100 115 5.1% II

4% 338 90 105 5.4%

and Made Kreteks

SKT III 7% 334 65 75 3.7%

0.0% 873 325 5.6% 3.1% 561 295 15.3% I

0.2% 455 245

365

32.3%

0.4% 412 215 235 6.0% 0.3% 300 175 190 6.1%

White Cigarettes

SPM

II 0.5% 261 110 125 7.0%

Source: WHO and Ministry of Finance (MoF) Indonesia 2012

Philippines

• Current tax bill in the parliament reducing a number of specific tiers to two tiers and reaching to a uniform specific rate in 3-5 years.

Arguments against tax increases

• Illicit trade – Conditioned-fear for governments against tax Increases

• Farmers' livelihood, is it tax or globalization?

• Industry consolidation – definitely globalization

Although differences in cigarette taxes and prices can be an incentive for illicit

trade, but

there is no direct link between the level of tax/price and smuggling.

Sample size of 76 countries. Source: WHO report on the global tobacco epidemic and Euromonitor data on illicit trade.

Price of most sold brand and illicit trade by country, 2010-11

No cross-country evidence of a direct link between high

cigarette prices and the amount of illicit trade

AUS

BOL

BLG

CAN

FRY

DOM

EGP

GEO GRC

IRQ IRL

JPN

LVA

NZL NOR

PAK

RUS

TUR GBR

0%

10%

20%

30%

40%

50%

0.0 3.0 6.0 9.0 12.0 15.0

Illic

it Tr

ade

(% M

arke

t)

Price (USD per Pack)

Excise per pack of most sold brand and illicit trade by country, 2010-11

ARG AUS

AUT

BOL

BGR

URY

CHL DNK

FRA GEO DEU GRC

GTM

IRQ IRL

ITA JPN

LVA

LTU

NZL NOR

PAK

RUS SGP

SWE TUR

GBR

0%

10%

20%

30%

40%

50%

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Illic

it Tr

ade

(% m

arke

t)

Excise (USD per Pack)

No cross-country evidence of a direct link between high levels

of cigarette tax and

Sample size of 76 countries. Source: WHO report on the global tobacco epidemic and Euromonitor data on illicit trade.

Illicit trade increases with corruption, 2009

Sources: World Bank corruption index, Euromonitor and ERC databases.

Smuggling (as % of legal sales) and WB corruption index in 2009

RUS

LAO

DNK

BEL

LVA

LBN

GRC

SGP

BOLUAE

UZB

FIN

EST

AZE

y = -0.0146x + 0.2179R2 = 0.05

0%

10%

20%

30%

40%

50%

2 3 4 5 6 7 8 9 10Corruption Index

Smugg

ling as

a % sh

are of

legal c

onsum

ption

(most corruption) (least corruption)

Illicit trade falls in the UK despite price growth

Sources: UK Customs and Excise 2010 and Euromonitor 2011.

Illicit trade falls in Italy despite higher taxes and prices on cigarettes

Sources: Constructed by WHO using Euromonitor and ERC databases.

Tax & Farmers' Livelihoods

Lets have a brief global tour to understand what is happening.

Cigarettes are NO LONGER produced by Countries, but the following Multi National

Tobacco Companies Share Distribution of the Global Tobacco Market, 2010

Source: Constructed by WHO using Euromonitor database 2011

In most countries Multinational Tobacco Companies pay for

farmer

• lower than the costs of tobacco leaves- leaving farmers in lifetime depth

• less than what they pay for imported leaves – Philippines: – Farmers get 75 Pesos per kg of tobacco leaves. – Import price tobacco leaves is 137 Pesos per kg.

• Why?

Leaf Production tons in 1990

Leaf Production in tons in 2010

% change 1990 and 2010

Excise tax as % of RP (MPPC)

China 2,645,608.00 3,005,753.00 14% 24%

United States of America 737,710.00 325,766.00 -56% 40% India 551,600.00 755,500.00 37% 28% Brazil 445,489.00 787,617.00 77% 27% Turkey 296,008.00 55,000.00 -81% 63% Italy 214,851.00 89,112.00 -59% 58% Indonesia 156,432.00 122,276.00 -22% 46% Greece 135,685.00 22,000.00 -84% 67% Zimbabwe 130,394.00 109,737.00 -16% 39% Malawi 101,028.00 220,198.00 118% n/a Philippines 81,723.00 40,530.00 -50% 39% Japan 80,500.00 29,300.00 -64% 58% Bulgaria 76,542.00 41,056.00 -46% 72% Republic of Korea 70,073.00 41,100.00 -41% 53% Thailand 69,469.00 58,912.00 -15% 62%

That changed the global production structure for tobacco leaves

Source: COMTRADE 2012

Some are out, some are in Major Leaf Producers Rank in

1990 Major Leaf Producers

Rank in 2010

China 1 China 1

USA 2 Brazil 2

India 3 India 3

Brazil 4 USA 4

Turkey (out) 5 Malawi 5

Italy 6 Argentina (IN) 6

Indonesia 7 Indonesia 7

Greece (out) 8 Pakistan (IN) 8

Zimbabwe 9 Zimbabwe 9

Malawi 10 Zambia (IN) 10

Philippines (out) 11 Italy 11

Japan (out) 12 Mozambique (IN) 12

Bulgaria (out) 13 Dem Prep Korea (IN) 13

Republic of Korea (out) 14 Thailand 14

Thailand 15 Viet Nam (IN) 15

Source: FAO 2012

Major tobacco leaf producers became net importers

-500

-400

-300

-200

-100

0

100

200

300

400

500Expoert-import quantity Trade balance US$

Source: FAO 2012

14.72

6.12 5.56 5.39

4.77

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Export price Import price

Who makes money?

Source: COMTRADE 2012

Few has positive balance from tobacco leaf trade 2011

-500

-400

-300

-200

-100

0

100

200

300

400

500

Export-import quantity Trade balance US$

Source: COMTRADE 2012

If the tax increases, we will move to another country.

Is it a threat or economic reality? • This is an economic reality. • As the countries establish

economic blocks or customs unions, it is economically less profitable to keep production facilities in every country.

Some examples. FROM Excise Tax per

pack % TO Excise Tax

per pack % Action

Uganda 29% Kenya 50% Moved

Ghana 14% Nigeria 16% Moved

Angola Mauritius Cameroon

n/a 59% 9.2%

Serve from S. Africa

41% Closed

Canada 58% Mexico 50% Moved

Hong Kong to Malaysia

47%

Malaysia to Hong Kong

Moved

Russia to Kazakhstan

20% 16%

Kazakhstan to Russia

16% 20%

Argument

Senegal to 26% One of UEMOA MS

<26% Argument

Living in global village that everything is linked

together. Without understanding global change, blaming

tax increases is a political scapegoat