Administration of Tobacco Taxes Worldwide & in Thailand & Best Practices

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1 Administration of Tobacco Taxes Worldwide & in Thailand & Best Practices Ayda A. Yurekli, PhD, Coordinator & Mark Goodchild, Tax Economist Tobacco Control Economics Tobacco Free Initiative WHO Bangkok, Thailand, April 21, 2011

2 When achieving higher revenues while reducing consumption is the goal Strength of tax administration & tailoring excise taxes on country situation are essential

3 Worldwide Tobacco Tax Application Sustainability of higher tax revenues Three areas need special attention Types of taxes levied on tobacco products Implementation, and: Administration of taxation

4 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

5 Worldwide Tobacco Tax Application The technical capacity of tax administrators Technical Capacity Knowing your taxes and their effects to Tax revenues, Producers' pricing schema Consumer's behaviour Knowledge about the market Monitoring the market- Analytic ability of technocrats the impact of changes in the market to the government revenues

6 Positive Effect of Tax Increases on Revenues Results from: Low share of tax in price: Implies large tax increase has much smaller impact on price & Less than proportionate decline in consumption: 10% price increase reduces consumption by 4% Low price elasticity of tobacco demand

7 Thailand Excise Tax System Concerns Government's ownership: Conflict of interest Could the government help Thailand Tobacco Monopoly (TTM) to survive? Inefficient and ineffective excise tax system Does not respond to the changes in the market Not helpful for generating revenues and NOT helpful for the TTM. Huge undervaluation problem

8 Retail price of most sold brand and total tax share (%) in 2010 Thailand & neighbours % % % % % 54% Retail price, PPP Total tax share 42% 39% 33% 32% 68% 63% Sri Lanka Malaysia India Thailand Nepal Indonesia Viet Nam Mongolia Maldives Laos Bangladesh Philippines Source: WHO Report on the Global Tobacco Epidemic 2011

9 Total and excise tax per pack in US$PPP 2010 Thailand & neighbors Total tax /pack in $PPP Excise tax/pack in $PPP PPP$ per pack Sri Lanka Malaysia Thailand India Indonesia Viet Nam Bangladesh Nepal Mongolia Maldives Laos Philippines Source: WHO Report on the Global Tobacco Epidemic 2011

10 How do other countries tax their tobacco products? Global and Regional Overview

11 Worldwide Tobacco Tax Application Examples Excise Application on Cigarettes Number of countries Total covered 182 Specific excise only 55 Ad valorem excise only 60 Mixture of both excises 48 No Excise 19 Source: WHO Technical Manual on Tobacco Tax Administration 2010

12 Worldwide Tobacco Tax Application Examples Types of taxes levied by countries by Income Group, in 2008 Specific Excise Ad Valorem Only Mixture of excises No Excise, but Import duty Only Number of Countries High Income N=45 Upper Middle Income N=39 Lower Middle Income N=43 Lower Income N=40 Source: WHO Technical Manual on Tobacco Tax Administration 2010

13 Worldwide Tobacco Tax Application Examples Types of taxes levied by countries by WHO Region in 2008 Specific Ad-Valorem No excise but ID Mix Excise 36 N of countries AFRO N=46 AMRO N=34 EMRO N=20 EURO N=49 WPRO N=25 SEARO N=8 Geographic Region Source: WHO Technical Manual on Tobacco Tax Administration 2010

14 Average Price of the Most Sold Brand & Excise Tax per pack, and Total Tax Share By Income Group 2010 Average price per pack Excise tax per pack (Total Tax share (% of Price International $ % 50.6% 45.8% % % High Income Upper-middle Income Lower-middle Income Low Income Global Source: WHO Report on the Global Tobacco Epidemic 2011

15 Average Price of the Most Sold Brand & Excise Tax per pack, and Total Tax Share By Region 2010 Average price per pack Excise tax per pack Total tax share (%of Price) 65.6% 53.6% International $ % 43.2% % % % AFRO AMRO EMRO EURO SEARO WPRO Source: WHO Report on the Global Tobacco Epidemic 2011

16 Worldwide Tobacco Tax Application Examples: Tier Excise System Differential /Tiered Excise taxes on cigarettes Number of countries Total covered 156 With tiers 32 Base of tiers Retail price 11 Producer price 2 Sales volume 1 Production volume 1 Type - filter/non filter 12 Type - hand/machine made 2 Type - kretek/white cigarette 1 Packaging soft/hard 3 Cigarette length 4 Trade domestic/imported 1 Weight (tobacco content in cigarette) 1 Leaf content (domestic/imported) 3 Note :Of the 155 countries with available data in TMA, 10 countries has no excise Some countries differentiate based on more than on criteria. 8 countries differentiate their excises based on more than 1 criteria Source: WHO Technical Manual on Tobacco Tax Administration 2010

17 Excise Administration Country example: USA Cigars Low priced cigars High priced cigars Chewing tobacco Moist snuff Roll your own Pipe tobacco Rolling papers $ per pack on small cigars 52.75% of price; cap of cents per cigar 3.1 cents per ounce $1.51 per pound $24.78 per pound 17.7 cents per ounce 1.26 cents per pack Source: Chaloupka 2010

18 Mixture of Excise Application Example: EU Excise duties must account for at least 57% of the retail selling price, inclusive of all taxes, and be at least 64 per 1000 cigarettes for the cigarettes belonging to the most popular price category (MPPC). The specific component of excise duty must not be less than 5% or more than 55% of the total tax share in final price of cigarettes in the MPPC. Member States may levy a minimum excise tax that may not be more than 100% of the total excise on the MPPC. Source: EU Tax Directorate 2011

19 Mixture of Excise Application Example: EU: specific as % TIRSP ad valorem % TIRSP Excise share in retail price 58% 57% 57% 55% 52% 52% 50% 50% 48% 49% 43% 43% 45% 44% 42% 39% 35% 36% 39% 38% 36% 34% 35% 35% 37% 33% 30% 31% 31% 28% 24% 25% 23% 24% 28% 25% 23% 21% 22% 21% 18% 13% 15% 15% 12% 11% 9% 6% 7% 8% 6% 4% 7% IE UK FR BE DE NL DK FI SE MT AT IT PT LU EL ES CY SK BG CZ RO SI LV EE HU LT PL Note: TIRSP is Tax Inclusive Retail Sales Price Source: EU Tax Directorate 2011

20 Excise Administration New EU initiative In November 2008, updating EU rules so that a higher level of public health is ensured. MPPC will be replaced by a weighted average price (WAP) as a reference point for EU minimum requirements. The health objectives of tobacco excises, the monetary minimum duty will apply to all cigarettes and will be increased gradually over the next five years to 90 on all cigarettes, irrespective of the WAP, with an overall excise duty on cigarettes of at least 60% of the WAP.

21 Excise Administration Justification for EU System Recognizing the health objectives of cigarette excises & The fact that specific taxation favours producers of expensive brands, Therefore favours a more customized system: effectively apply a specific tax to lower-priced brands (through a minimum specific tax floor) and an ad valorem tax to the higher-priced ones. This way, taxes contribute to a level-playing field among manufacturers- Source: ex_en.htm

22 Excise Administration Simplifying Excise System: Egypt 2009 Tax System Net of tax price per pack of less than 65 P.T. more than 65 to 73 P.T more than 73 to 84 P.T. more than 84 to 95 P.T. more than 95 to 106 P.T. more than 106 to 300 P.T more than 300 to 425 P.T. more than 425 P.T. GST/pack 108 P.T 112 P.T 125 P.T. 140 P.T. 153 P.T. 175 P.T. 315 P.T. 325 P.T Tax System Mixture of Excise Ad valorem: 40% of Retail Price Specific: EP1.25/pack Source: WHO and Ministry of Finance (MoF) Egypt 2010

23 Excise application Pakistan: Specific, Specific+ ad valorem, Ad valorem FED/pack of Pakistan Excise tax (FED) rates and the share of FED revenue by Price and Tax Tiers, Low Tax Tier 10% of FED Mid Tax Tier 79% of FED 76% of FED Gold Flake Marven Gold High Tax Tier 10% FED Retail price/pack of 10 pieces Source: WHO 2009

24 Excise application Country example: Bangladesh Tier tax structure based on cost of cigarettes and price of cigarettes Industry has to submit the costs and the suggested retail prices for the new brands. MoF determines existing brands' retail prices when increasing tax rates Source: WHO 2009

25 Bangladesh Tax System Ad valorem excise as % of retail price Tier Excise System and Price Blocks 75% 65% 55% 53% 56% 58% 45% 35% 33% 25% Cheapest Middle High Premium 15% Retail Price by tiers Source: WHO calculation based on MoF Budget announcement for FY

26 Excise application Turkey: Minimum Specific Floor with Ad valorem Excise per pack Excise system and price of cigarettes in 2009 in Turkey 1.5 Specific Floor Excise Cheaper brands Mid to high price brands Retail Price/pack Excise tax per pack After excise change with dramatice specific floor increase & increases in ad valorem in No brands under specific floor excise, all prices increased Retail Price per pack Source: Yurekli et al 2011

27 Russia Mixed Excise System with Minimum tax Tax per pack (RUB) Specific tax Minimum tax ) Ad valorem = 6% Price per pack (RUB) Non-Filter Cigarettes 72 rubles/1,000 pieces + 6% of the net ex-factory price (but not less than 93 rubles/1,000 pieces) Filter Cigarettes 150 rubles/1,000 pieces + 6% of the net ex-factory price (but not less than 177 rubles/1,000 pieces) Source: WHO calculation, Konstantin Krakovsky, Euromonitor 2011

28 Ukraine Mixed Excise System without Minimum Tax 2009 Filtered Cigarettes Tax/pack Specific tax 16% Ad Valorem on Maximum RP Maximum Retail Price/pack Effective July 1, 2009, cigarette excise taxes Filtered: 16% ad valorem tax + a 45.0 Hyrvnia per 1,000 pieces specific tax; & Non-filtered: 16% ad valorem tax + a 19.5 Hyrvnia per 1,000 pieces specific tax Source: WHO calculation by Konstantin Krakovsky and public data of MoF Ukraine 2009

29 Brazil Tax Application 2009 Based on Package & Length of Cigarettes Social Tax 3.54% of the retail price Welfare Tax 0.90% of the retail price VAT 25.0% of the retail price Specific Tax: Soft Pack less than 88mm reals per 1,000 pieces 88mm or more reals per 1,000 pieces Soft Pack version of Hard pack: Less than 88mm reals per 1,000 pieces 88mm or more reals per 1,000 pieces Hard Pack less than 88mm reals per 1,000 pieces 88mm or more reals per 1,000 pieces Source: WHO database and public data by MoF Brazil 2009

30 New Indonesia Tax Application 2009 Based on production, type & price TYPE OF TOBACCO Production tier Pieces produced Price (HJE) Rp./stick EXCISE RATE Rp/stick Machine -made Kreteks SKM I > 2 billion II > 500 million & 2 billion SKM Total Hand -made Kreteks SKT I > 2 billion II > 500 million & 2 billion III > 6 million & 500 million SKT Total White Cigarettes SPM I > 2 billion II > 500 million & 2 billion Source: Public data by Indonesia Ministry of Finance (MoF) 2009 after Budget Announcement

31 India Tax Application for Cigarettes 2009 Base on length of cigarettes and Filter vs. non-filter Product Cigarettes (Tax Base rupees per 1,000 pieces) Tax GSI NCCD Total Non- filter: (not exceeding 60 mm) (between 61 and 70 mm) 1, ,338 filter: (not exceeding 70 mm) ,104 (between 71 and 75 mm) 1, ,623 (between 76 and 85 mm) 1, ,159 (exceeding 85 mm) 1, ,658 Made with tobacco substitutes 1, ,150 Source: Budget announcement by MoF India 2009

32 Philippines Tax Administration 2009 Price base Tax base: Per pack of 20 pieces Net retail price of more than 10 pesos/pack Net retail price between 6.5 and 10 pesos/ pack Net retail price between 5 and 6.5 pesos/pack Net retail price of less than 5 pesos/pack Net retail price of hand-rolled Specific tax/pack pesos pesos 6.74 pesos 2.23 pesos 2.23 pesos Source: Public data by MoF Philippines 2009

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34 WHO s Best Practices in Tobacco Taxation Use excise taxes to achieve public health goals Higher excise taxes are good for public health the effectiveness of higher tobacco product taxes and prices in reducing tobacco use and its consequences, particularly among the poor and the young. Source: WHO Technical Manual on Tobacco Tax Administration

35 WHO s Best Practices in Tobacco Taxation Set tobacco excise tax levels at least 70 percent of the retail prices for tobacco products, that would lead to significant price increases, induce many current users to quit, and deter numerous youth from taking up tobacco use, leading to large reductions in the death and disease caused by tobacco use. At the same time, such tax increases generate significant increases in tobacco tax revenues. Source: WHO Technical Manual on Tobacco Tax Administration

36 WHO s Best Practices in Tobacco Taxation Simpler is better Complex tax structures more difficult to administer Greater opportunities for tax evasion and tax avoidance under complex tax structures Where existing structure is more complex, simplify over time with goal of achieving single uniform tax Source: WHO Technical Manual on Tobacco Tax Administration

37 WHO s Best Practices in Tobacco Taxation Rely more on specific tobacco excises as the share of total excises in prices increases Greater public health impact of specific excises given reduced opportunities for switching down in response to tax/price increases Sends clear message that all brands are equally harmful Where existing tax is ad valorem, adopt a specific tax and increase reliance on specific tax over time Source WHO Technical Manual on Tobacco Tax Administration

38 WHO Best Practices for Tobacco Excise Taxes Adopt comparable taxes and tax increases on all tobacco products Maximizes public health impact of tobacco tax increases by minimizing opportunities for substitution Source: WHO Technical Manual on Tobacco Tax Administration

39 WHO s Best Practices in Tobacco Taxation Eliminate tax or duty free sales of tobacco products As called for in Article 6 of the WHO FCTC Reduces opportunities for individual tax avoidance Maximizes public health and revenue impact of taxes/tax increases Source: WHO Technical Manual on Tobacco Tax Administration

40 WHO s Best Practices in Tobacco Taxation Adopt new technologies to strengthen tobacco tax administration and minimize tax avoidance and evasion Sophisticated tax stamps Tracking and tracing technologies Production monitoring technologies Source: WHO Technical Manual on Tobacco Tax Administration

41 WHO s Best Practices in Tobacco Taxation Strengthen tax administrators capacity to monitor tobacco product markets and evaluate the impact of tobacco tax increases Trust but verify Monitoring of tobacco production and distribution Physical control over tobacco products Periodic audits Capacity to estimate impact of tax changes on consumption, revenues Source: WHO Technical Manual on Tobacco Tax Administration