TURKISH EXPERIENCE ON TOBACCO TAXATION AND MONITORING OF INDUSTRY. Seyit Ahmet BAS. Deputy Undersecretary Ministry of Finance of Turkey

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1 TURKISH EXPERIENCE ON TOBACCO TAXATION AND MONITORING OF INDUSTRY Seyit Ahmet BAS Deputy Undersecretary Ministry of Finance of Turkey

2 PRESENTATION OUTLINE DEVELOPMENTS OF TOBACCO TAXATİON WITHIN 10 YEARS Tax & Price Increases - Average excise taxes - Cigarettes prices - Total tax burden on tobacco products Tax burden increase - Excise tax change & CPI indexes - Total excise tax / Tax revenues & GNP Changes in Registered Sales EXCISE TAX SYSTEM CHANGES Transition Period - Up to After 2002 New System - Excise tax system - Monitoring system FIRMS BEHAVIOUR

3 DEVELOPMENTS OF TOBACCO TAXATİON WITHIN 10 YEARS Excise tax increased gradually Prices increased gradually Average Excise Tax & Cigarettes Prices f Average Excise (TL) Average Price (TL)

4 DEVELOPMENTS OF TOBACCO TAXATİON WITHIN 10 YEARS Excise tax collection increased in nominal and real terms Tax burden increased aproximately 4.3 times in real terms Excise Duty Collection (Billion TL) f Nominal Term Real Term

5 DEVELOPMENTS OF TOBACCO TAXATION WITHIN 10 YEARS -Excise revenue from cigarettes increased in real term -% increases in excise revenue have been higher than the % increases in CPI f (%) Change in Excise (%) Change in CPI Within 10 years; - Total increase in Excise Revenue is 341.5% - Increases in CPI index is 203.5%

6 DEVELOPMENTS OF TOBACCO TAXATİON WITHIN 10 YEARS - The share of tobacco excise revenue in total tax revenue & in GDP increased more than 3 fold between 2000 & Excise Duty / Tax Rev. (%) Excise Duty / GNP (%) f

7 DEVELOPMENTS OF TOBACCO TAXATİON WITHIN 10 YEARS - 3.7% drop in registered sales, - Around 11% drop in 2010 (forecast) Registered sales % changes in sales 6,000 5,800 5,600 5, % 3.4% 109.0% 66.0% 42.3% % -44.0% % % -28.5% ,200 5, , , % 4, F -12

8 EXCISE TAX SYSTEM CHANGES Before 2002, VAT + Increased VAT+ seven different types of taxes, fees and funds Between 2002 and 2005 After 2005 VAT + Excise tax Different types of ad-valorem and fixed excise taxes depending on price category, tobacco blend, VAT + Excise tax the ad-valorem tax with the specific tax floor. Taxpayer: manufacturers Payment time: next month after sales. Taxbase: market price Tax base change

9 EXCISE TAX SYSTEM CHANGES - Fixed tax amount depending on price or tobacco blend in 2004 mislead the market. Excise Tax System Over The Years Tax Rate (%) Fixed Tax (TL) Average Excise Tax (TL) ,3-0, I 55,3 Depends on Price 1, II 28 Depends on Blend 1, ,20 1, ,40 1, ,50 1, ,55 2, ,05 2, ,65 3,16

10 EXCISE TAX SYSTEM CHANGES Security Measure: Specific Excise Tax In 2004, Competition reduced prices and tax collection, increased consumption. In 2005, the new excise system put into force, prices and tax collection increased. 6,00 Average Excise Tax & Sigarettes Prices 5,50 5,00 4,00 3,00 2,00 1,00 0,00 0,97 1,13 0,78 0,84 0,50 0,37 0,20 0,13 New excise system 3,25 3,70 3,16 2,97 2,69 2,37 2,15 2,03 2,02 1,80 1,60 1,65 1,34 1,50 1,55 1,20 1,40 2,65 2, f Average Excise (TL) Average Price (TL) Fixed Excise Tax

11 EXCISE TAX SYSTEM CHANGES How Turkish Excise System Works Specific Excise Floor, Ad Valorem Tax Specific excise tax is determined by the government Ad-valorem tax is calculated by multiplying ad valorem rate by the retail price Tax liability is either specific or ad valorem whichever is higher Tax 5,0 4,5 Fixed tax area Ad-valorem tax area 4,41 4,41 4,0 3,5 3,0 2,5 2,0 1,5 2,65 2,65 2,65 2,65 2,65 2,65 2,52 1,89 3,15 3,15 3,78 3,78 1,0 0,5 0,63 1,26 0, , Ad-valorem tax (TL) Fixed tax (TL) Price

12 FIRMS' PRICING BEHAVIOUR AGAINST SPECIFIC EXCISE FLOOR INCREASE Specific excise tax increased gradually by year. It forced the retail prices of low-end price band cigarettes upwards. Retail prices of increased by 108% between 2005 & 2009 Retail price for high price band cigarettes increased by 43% between 2005 & 09 The government lost some potential revenue Specific excise /pack (TL) Low price band cigarettes retail price High price band cigarettes retail price Excise Revenue (Billion TL) ,20 1,20 3, ,40 1,70 4, ,50 1,90 4, ,55 2,15 4, ,05 2,50 5, years (%) change 70,8% 108,3% 42,86% 62,1%

13 MONITORING SYSTEM IN GENERAL In the production line and importation: banderolls applies Sale to distributors: Filing for tax purposes Logistics: subjected to control (banderoll and tax) Sale to retailer: filing to regulatory body Subjected to control (banderoll and tax) MANUFACTURER DISTRIBUTER RETAILER Manufactured - How many packs, - from which brand, -from which retail price Sold to distributors - How many packs, - from which brand, -from which retail price Sold to retailors - How many packs, - from which brand, -from which retail price Bandrol system specification:

14 MONITORING SYSTEM MONITORING OF PRODUCTION -Banderolls bought by manufacturers -Banderolls activated for local market and for export -Banderolls stock at manufacturers. 700 Banderoll &Production (million unit) / / Banderol Stocks in Manufacturars Total Production For Local Market For Export Banderols Sold

15 MONITORING SYSTEM MONITORING OF SALES AND STOCKS - Cigarettes flow between manufacturers, distributers and retailers and Stock changes in the market Jan Feb Mar Apr.09 May.09 Jun.09 July 09 Agu.09 Sept.09 Oct.09 Nov.09 Dec.09 Jan.10 Feb.10 Mar.10 Apr.10 May.10 June.10 Retailors Net Manufacturars Sales Distributors Sales Retailors St

16 FIRMS BEHAVIOUR Firms Behaviour Against: Gradualy increasing fixed rate in 2004 depending on price or blend. Fixed tax for all between Ad-valorem rate increase in 2010 Visual health warnings

17 CONCLUSION: Strengthened Excise Tax System Ministry of Finance has a STRONG HAND because of the system; Ad-valorem tax with specific tax floor. Monitor production plans Monitor production for local market and export. Monitor every stock movement on every stage Know industry s stock and tax plans