Until 2013, the ad valorem excise tax rate on cigarettes was 25%, but when Philip Morris and JTI became beneficiaries of Tedis, the ad valorem rate was reduced to 12%, and since then, bills that would increase this rate have simply not been submitted to the Verkhovna Rada. This was stated by journalist Denys Bezlyudko on his Facebook page.
“While the U.S. Congress is “chewing the fat” on the issue of aid to Ukraine, the Cabinet of Ministers is already digging around for money: it’s cutting bones, raising taxes in almost all areas except one – the tobacco market. It would seem so, but there is actually a lot of room for improvement. To begin with, in August 2023, the NACP added two international tobacco companies – Philip Morris International and Japan Tobacco International – to the list of international sponsors of war that still operate in Russia, occupy a dominant market position there (30% and 34%) and fill its military budget. In particular, Philip Morris paid $136 million in taxes to the Russian Federation in pre-war 2021. JTI, I think, paid no less. Therefore, they are obliged to pay more to the Ukrainian budget,” he wrote.
The journalist explained that Ukraine currently has the following scheme of excise taxation of the tobacco market: the minimum excise duty is UAH 2,516.54 per 1 thousand cigarettes. pieces, the specific rate is UAH 1881.17 per 1 thousand. pieces and an ad valorem rate of 12%.
“The nuance is that the ad valorem is not noticeable now and does not affect the taxation of the premium segment. For example, on a pack of cigarettes costing UAH 60, the total excise tax paid by companies (or rather smokers) is UAH 50.33. And on a pack of cigarettes costing UAH 106, it is UAH 50.34. Feel the difference. I will leave the calculations in the comments. A little bit of background. Until 2013, the ad valorem excise rate on cigarettes was 25%. But… In 2010, under [President] Viktor Yanukovych, Megapolis-Ukraine (now Tedis) appeared on the tobacco market and monopolized the retail market. In addition to the “family of the legitimate,” the company was linked to Borys Kaufman (Google it). Evil tongues even said that Russian arms baron Igor Kesayev was behind the monopolist,” Bezlyudko said.
He added that in 2013, Philip Morris and JTI became TEDIS beneficiaries, while the ad valorem rate was reduced to 12% and the situation “cemented”: bills that would raise the rate are simply not submitted to the Verkhovna Rada session hall.
“In Europe, which we like to look up to, ad valorem excise rates on cigarettes are generally between 25% and 50% (in some countries even higher). Experts estimate that over the 11 years of the reduced rate, the Ukrainian budget has lost about UAH 100 billion. This is in contrast to Russia, where the ad valorem rate reaches 16%. Premium brands in the tobacco manufacturers’ lineup are up to 30%. And the demand for the premium segment is mostly inelastic. That is, for a person with a fairly high income (unlike the majority of the population), an increase in the amount of excise tax they pay is not important. He is unlikely to switch to the conditional Vatra. But the budget of Ukraine will receive additional revenues,” the author explained.
According to Bezlyudko, in order to implement such a plan, it is necessary to eliminate the discrepancy.
“Well, it’s high time Philip Morris and JTI left the Russian market. Patience is not rubber,” he said.
In his comments, the journalist gave his calculations based on the retail price of a pack of cigarettes of 60 UAH: “60.00 UAH × 12% = 7.2 UAH – 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, but 44.82 UAH is less than 50.33 UAH (minimum excise tax liability), so 50.33 UAH of excise tax per pack must be paid to the budget.”
Given the retail price of a pack of cigarettes of UAH 106, his calculations are as follows: “106.00 UAH × 12% = 12.72 UAH – ad valorem component of the excise tax; 37.62 UAH – specific excise tax rate; 37.62 + 12.72 = 50.34 UAH – amount of excise tax per pack of cigarettes. UAH 50.34 is more than UAH 50.33 (the minimum excise duty), so UAH 50.34 of excise tax per pack must be paid to the budget.”