Ukraine, in the third year of the war, is facing a growing budget deficit and decreasing financial assistance from its partners. This jeopardized the performance of state functions and forced the government to look for “internal reserves.” Experts believe that one of these reserves is the production and sale of tobacco products, which brings significant profits to multinational companies such as Philip Morris Ukraine, British American Tobacco Ukraine, JT International Ukraine, and Imperial Tobacco Production Ukraine.
In 2013, during the rule of former President Viktor Yanukovych and the government of Mykola Azarov, tobacco company lobbyists succeeded in reducing the ad valorem tax on cigarettes from 25% to 12%. This compares with European rates, which range from 25% to 50% (even up to 52%), and is also higher than in Russia (16%). Experts have calculated that Ukraine has lost at least 100 billion hryvnias over the past 10 years due to this discrepancy.
According to the Tax Code of Ukraine, the excise tax on tobacco products is calculated on the basis of specific and ad valorem rates simultaneously. Currently, the ad valorem tax applies only to cigarettes costing more than UAH 106 per pack and is set at 12%.
Calculations
Since a pack contains 20 cigarettes, it is:
- Minimum excise duty: UAH 2,516.54 / 1000 * 20 = UAH 50.33.
- Specific rate: 1 881.17 / 1000 * 20 = 37.62 UAH.
Thus, the minimum amount of excise tax (at the specific and ad valorem rates combined) on one pack of cigarettes (20 pieces) is UAH 50.33, regardless of the value of such a pack.
For example, let’s take the cost of a pack of cigarettes (20 pieces) as 60.00 UAH. – maximum retail price (hereinafter referred to as MRP):
- 60.00 UAH. x 12% = UAH 7.2 – ad valorem component of the excise tax;
- 37.62 UAH. – specific excise tax rate;
- 37.62 + 7.2 = 44.82 UAH. – the amount of excise tax per pack of cigarettes (20 pcs.) at the MRP of UAH 60.00.
But 44.82 UAH. is less than UAH 50.33. (minimum excise duty), so UAH 50.33 is payable to the budget. excise tax for a pack of cigarettes (20 pcs.) at an MRP of UAH 60.00.
For example, let’s take the cost of a pack of cigarettes (20 pieces) as a basis of UAH 106.00. – maximum retail price (hereinafter referred to as MRP):
- 106.00 UAH. x 12% = UAH 12.72. – ad valorem component of the excise tax;
- 37.62 UAH. – specific excise tax rate;
- 37.62 + 12.72 = 50.34 UAH. – the amount of excise tax for a pack of cigarettes (20 pcs.) at the MRP of UAH 106.00.
So it’s 50.34 UAH. is more than UAH 50.33. (minimum excise duty), so UAH 50.34 is payable to the budget. excise tax for a pack of cigarettes (20 pcs.) at the MRP of UAH 106.00.
Thus, with an increase in the cost of a pack of cigarettes (20 pcs.) by UAH 46.00. excise tax is increased by 1 kopeck.
It is necessary to increase the ad valorem, as Ukraine loses tens of billions annually
Journalist Denys Bezlyudko explains that the increase in the ad valorem rate will not significantly affect the demand for premium cigarettes for people with high incomes, but will bring additional revenues to the Ukrainian budget. Calculations show that under the current taxation system, the minimum amount of excise tax per pack of cigarettes is the same regardless of its value.
Attention should be paid to the ad valorem excise tax rate on cigarettes, which remains low, resulting in losses of tens of billions of hryvnias annually. Nevertheless, the issue of raising rates remains unresolved even after the change of government in Ukraine. Tax initiatives on this issue are delayed in the Verkhovna Rada, while profits continue to flow to multinational companies. Experts believe that this situation should be immediately remedied by raising the ad valorem rate.