European prices for Ukrainian smokers: New increasing costs of cigarettes

Author : Olena Holubeva

Source : 112 Ukraine

Ukraine should forget about cheap cigarettes. The country has to comply with the requirements of the EU
15:37, 13 September 2017

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The draft laws presuming a significant increase in the tax burden on tobacco companies are developed in accordance with the requirements of Directive No. 20111/64 / EC of June 21, 2011 (on the structure and rates of excise that apply to tobacco products). Ukraine's compliance with the requirements of the directive is assumed by Supplement XXVIII to Chapter 4 "Taxation" of Section V "Economic and Sectoral Cooperation" of the Association Agreement between Ukraine and the EU.

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One of the bills of the Ministry of Finance "On Amending the Tax Code of Ukraine" (regarding the approximation of the level of excise tax rates on tobacco products to the minimum level, like in the EU) was published on the website of the Ministry on August 30. The document suggests raising the minimum tax liability for cigarettes in Ukraine to 90 euros per 1,000 pieces in 2025. Now it is set at the level of 21 euros (596.05 UAH) for 1 thousand pieces. Considering that excise is one of the essential factors of pricing, the price of cigarettes can grow proportionally - 3-4 times, in comparison with the current one.

Since 2018, this document provides an increase in the specific component of the consumer price growth index (8.1%) to 25.84 euros (731.2 UAH) per 1,000 pieces (for filter cigarettes and cigarettes without a filter). In subsequent years, the rate should increase by 20% annually (in 2019 - to 31.01 euros, in 2020 - to 37.21, in 2021 - to 44.66, in 2022 - to 53.59, in 2023 - to 64.30, in 2024 - to 77.16).

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Another bill of the Ministry of Finance, which is already registered in the Verkhovna Rada, "On Amendments to the Tax Code of Ukraine with respect to the revision of rates of certain taxes" No. 6,776 suggests a less radical increase in the specific component for cigarettes with a filter and without a filter from the current 14 euros per 1,000 pieces up to 16 euros. At the same time, the minimum tax liability increases from the current 19 euros per 1,000 pieces to 21 euros per 1,000 pieces.

Market participants say that the implementation of initiatives can lead to another round of rising prices for cigarettes, as well as an increase in the share of the shadow market.

The bills No.6776, 6683, 6683-1, which are registered in Ukrainian Rada, provide for different scenarios for changing excise duties: from indexation of excise rates to inflation level to increase of specific and minimum rates by 33%, notes the manager for fiscal regulation at JTI Ukraine (Winston, Sobranie, Glamour) Andriy Fita. "The Ministry of Finance also intends to raise the specific rate in 2018 by almost 30% in 2018," he notes.

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According to him, "JTI Ukraine" wants to adopt a long-term plan to increase excise rates, which would provide for an annual increase in the specific and minimum excise rates by 20%. "This will allow to harmonize the rates with the European ones for 8-13 years (depending on the devaluation), which is very close to the terms that the countries of Eastern Europe needed for harmonization, while this scenario would not be shocking for the state, for the industry, and for consumers," Fita noted.

Philip Morris insists on a 20 percent increase in the specific excise tax rate. "Our position remains consistent and absolutely justified, we are ready to increase the excise duty by 20% in 2018, if the rates remain in the national currency." At the same time, increasing the excise tax by more than 20% will lead to an increase in the price of cigarettes more than 3-5 hryvnia per pack. This, in our opinion, will only exacerbate the demand for illegal products," the press service of Philip Morris Ukraine (Chesterfield, Bond Street, Marlboro, L & M, Parliament) said in a commentary to

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Also, the company criticized the proposal of the Ministry of Finance to set excise tax rates in euros. "This carries the risk of a sharp rise in the price of tobacco products in case of devaluation of the national currency, and this initiative is not worked out from the point of view of administration. The difficulty for the tax calculation of the excise tax in hryvnia will be that if the excise is prepaid, there would be one rate, but for the date of sale of products, the rate may be quite different," the company notes.

Some market participants see an attempt to influence the market in the initiatives of deputies. In particular, producers of cheap cigarettes categorically disagree with the idea of raising only specific rates of excise duty. "At the moment, the Verkhovna Rada has registered a number of bills on increasing excise rates in 2018. Some of them are of an anticompetitive nature and provide for norms that are beneficial to individual producers. In particular, the bill 6638 suggests, in fact, to set a minimum price for cigarettes at 1 euro (30 UAH; at the point of sale), the manufacturer, who wants to sell for a cheaper price, will have to pay almost double the excise tax rate! People's deputies led by Oleksandra Kuzhel, who signed this bill at the request of certain tobacco companies, advocated fixing prices in the market and guaranteeing additional profits to individual "tobacconists" at the expense of unceremonious "robbery of the consumer," said the director for corporate and legal issues of Imperial Tobacco in Ukraine, Moldova and the Caucasus (Georgia, Armenia, Azerbaijan ) (West, R1, Style, "Prima") Oleh Strekal.

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Other market participants oppose the increase in the ad valorem component of the excise, provided in the recent legislative initiatives of the Ministry of Finance and deputies. In particular, some of them envisage raising the ad valorem rate by 8 percentage points - up to 20%. "The increase in the ad valorem does not affect the increase in the minimum excise duty, but only leads to the fact that consumers buy cheaper cigarettes from which the ad valor is not paid," Philip Morris Ukraine reported, stating also that "an increase in the ad valorem part of the excise tax contradicts EU-Ukraine Agreement on Association." "We believe that the ad valorem component should remain at the level at which it is today," said Fita.

The actions of the Ministry of Finance in the direction of working out legislative initiatives to increase excise rates on tobacco products in the company "Philip Morris Ukraine" were called "quite haphazard." "At the end of July this year, the Cabinet of Ministers proposed to raise the specific rate and the minimum excise tax on tobacco products by 11.2% at the initiative of the Ministry of Finance. A month later, the Ministry of Finance published a new initiative, proposing to convert excise rates in euros starting in 2018, which means a new growth rate of 8.1% and 20%," the press service of the company reported.

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"We believe that excise policy should be considered within the framework of those obligations that Ukraine assumed under the association agreement with the EU. These obligations provide for the harmonization of excises with European ones, that is, setting them at 90 euros per 1,000 cigarettes. There are several scenarios how to do it. We adhere to the position that excises should be increased gradually, taking into account the economic situation in Ukraine and the role played by the industry for stable revenues to the budget. The excise policy should be moderate and predictable," said Fita.

Imperial Tobacco is sure that it is necessary to raise costs of the specific rates of excise, as well as ad valorem. "This will allow us to balance the structure of the market by eliminating preferences for the producers of expensive cigarettes. Our company has always been a supporter of simultaneous increase of all components of the excise tax. Proportional change of all elements of the excise system will ensure market stability, will meet the principles of market neutrality and European approaches. Ad valorem rate will bring to the state budget additional 224,4 thousand euros in comparison with the model, which does not provide for ad valorem increase," Strekal said.

At the same time, producers note some "positive changes" in the approach of the Ministry of Finance to this issue. "Traditionally, the new excise rates are a New Year's gift. And this is despite the fact that the Tax Code of Ukraine provides that excise rates should be accepted in advance. The Code assumes that the rates should be approved 6 months before the start of a new period. In fact, rates were taken between December 20 and December 31 of each year, and they entered into force on January 1. In such a situation, we cannot talk about any planning and long-term business development strategy," Imperial Tobacco notes.

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"Now we are working on a predictable three-year plan to raise rates, but unlike previous years, the dialogue began in advance, not before the approval of the budget," said Andriy Fita.

In previous years, the Ministry of Finance often increased the excise tax on cigarettes just before the New Year, at a time when the Rada was voting for a budget. We will see whether something changes this year.

But one thing is clear: Ukraine should forget about cheap cigarettes. The country has to comply with the requirements of the EU, and the authorities took this course.



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