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 Total covered Specific excise only Ad valorem excise only Mixture of both excises No Excise 182 51 54 56 20 Note: the countries sum up to 181, the 182 nd 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 Excise tax structure Specific only Ad valorem only Mix system Relying more on specific Relying more on ad valorem Average price PPP 4.51 2.38 3.81 4.42 3.40 Average excise PPP 1.78 0.77 2.17 2.54 1.91 Source: WHO GTCR III 2011
Close Technical Engagement between WHO & MoF 2009 2010 2011 2012 China, Egypt, Pakistan (2), Turkey, Bangladesh (2), Vietnam, Mexico Ghana, India, Indonesia, Thailand 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 Net of tax price per pack of less than 65 P.T. 2009 Tier Excise System more than 65 to 73 P.T more than 73 to 84 P.T. more than 84 to 95 P.T. GST/pack 108 P.T 112 P.T 125 P.T. 140 P.T. more than 95 to 106 P.T. 153 P.T. more than 106 to 300 P.T more than 300 to 425 P.T. more than 425 P.T. 175 P.T. 315 P.T. 325 P.T. Tax 1.25 2010 Mix Excise System 40% Mixture of Excise Ad valorem: 40% of R. Price Specific: EP1.25/pack Price Source: WHO and Ministry of Finance (MoF) Egypt 2010
SIMPLER IS BETTER Kenya 2010 Description 2010 Tier Excise System 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 Rate/1000 sticks of cigarettes) Tax Ksh 1200 2011 Advalorem with specific floor 35% Hinge lid cigarettes or cigarettes of RSP of more than 4500 2500 Price 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 Machine made kreteks SKM and Made Kreteks SKT White Cigarettes SPM STRATA I II I II 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% 5% 618 295 325 5.9% 3% 596 245 270 5.1% 3% 442 210 6.9% 395 235 16% 170 20.2% 6% 816 235 255 3.0% 11% 577 180 195 3.2% 2% 540 155 9.1% 1% 417 110 125 4.4% 1% 362 100 115 5.1% 4% 338 90 105 5.4% III 7% 334 65 75 3.7% I II 0.0% 873 325 5.6% 3.1% 561 295 365 15.3% 0.2% 455 245 32.3% 0.4% 412 215 235 6.0% 0.3% 300 175 190 6.1% 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.
Illicit Trade (% Market) Price of most sold brand and illicit trade by country, 2010-11 50% 40% 30% 20% 10% BOL PAK IRQ EGP GEO LVA BLG DOM TUR GRC No cross-country evidence of a direct link between high cigarette prices and the amount of illicit trade CAN GBR IRL AUS NOR RUS JPN FRY NZL 0% 0.0 3.0 6.0 9.0 12.0 15.0 Price (USD per Pack) Sample size of 76 countries. Source: WHO report on the global tobacco epidemic and Euromonitor data on illicit trade.
Excise per pack of most sold brand and illicit trade by country, 2010-11 Illicit Trade (% market) 50% 40% 30% 20% 10% BOL PAK IRQ GEO RUS GTM ARG LVA LTU CHL BGR TUR JPN AUT GRC ITA SWE DEU DNK No cross-country evidence of a direct link between high levels of cigarette tax and 0% 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 URY FRA SGP NZL GBR AUS IRL NOR Excise (USD per Pack) 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 Smuggling (as % of legal sales) and WB corruption index in 2009 50% y = -0.0146x + 0.2179 R 2 = 0.05 Smuggling as a % share of legal consumption UAE 40% BOL LVA LAO 30% UZB EST LBN 20% SGP 10% AZE GRC BEL FIN RUS 0% DNK 2 3 4 5 6 7 8 9 10 (most corruption) Corruption Index (least corruption) Sources: World Bank corruption index, Euromonitor and ERC databases.
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?
That changed the global production structure for tobacco leaves 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% Source: COMTRADE 2012
Major Leaf Producers Some are out, some are in 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 -400-500 Expoert-import quantity Trade balance US$ Source: FAO 2012
Export price Import price 16.00 14.72 14.00 Who makes money? 12.00 10.00 8.00 6.00 6.12 5.56 5.39 4.77 4.00 2.00 0.00 Source: COMTRADE 2012
Few has positive balance from tobacco leaf trade 2011 Export-import quantity Trade balance US$ 500 400 300 200 100 0-100 -200-300 -400-500 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% Russia to Kazakhstan 20% 16% Malaysia to Hong Kong Kazakhstan to Russia Senegal to 26% One of UEMOA MS 16% 20% Moved Argument <26% Argument
Living in global village that everything is linked together. Without understanding global change, blaming tax increases is a political scapegoat