Category: Taxation

  • Korea Backtracks on Hnb Tax Increase

    Korea Backtracks on Hnb Tax Increase

    Photo: KT&G

    The government of South Korea has ditched a plan to raise the tax on heated-tobacco products just two days after the finance minister proposed the measure, reports The Korea Herald.

    South Korea currently taxes regular cigarettes at higher levels than noncombustible tobacco products because it considers the former to be more harmful to health.

    Combustible cigarettes attract a tax of KRW3,323 ($2.52) per pack, which includes a KRW1,007 tobacco excise tax, a KRW443 education tax, a KRW594 consumption tax, a KRW409 value-added tax, a KRW841 health promotion fee, a KRW24.4 waste charge and KRW5 to support tobacco farmers.

    Noncombusted cigarettes, by contrast, are subject to a tax of KRW3,004, which represents 90.4 percent of the taxes imposed on regular tobacco products.

    However, on April 17, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said noncombusted cigarettes “should be treated similarly to regular cigarettes.” 

    His comments immediately provoked a public backlash, prompting the government to backtrack. The government “is not currently considering raising the tobacco tax at the moment,” the finance ministry said in a statement on April 19. 

    South Korea’s revenue from tobacco products has shrunk in recent years due to declining sales of combustible cigarettes. In 2022, the government collected KRW11.8 trillion in taxes on all tobacco products compared with KRW12 trillion in 2020. While sales of tobacco-heating products increased during the same periods, their comparably low volumes and lower tax rates meant that they did not offset the revenue lost due to declining cigarette sales.

  • Pakistan To Miss Tax Target Due To Illicit Sales

    Pakistan To Miss Tax Target Due To Illicit Sales

    Photo: Piotr Pawinski

    Pakistan is unlikely to achieve its tax collection targets due to the rapid growth of illicit cigarette sales, reports Geo News, citing Philip Morris Pakistan Chief Financial Officer Muhammad Zeeshan.

    In February, the government increased the Federal Excise Duty on cigarettes in an attempt to boost revenues in line with the conditions for financial support from the International Monetary Fund.

    Following the tax hike, the duty on locally produced cigarettes retailing for more than PKR9,000 ($32.02) per 1,000 sticks is PKR16,500 while the duty on locally produced cigarettes retailing for less than PKR9,000 per 1,000 sticks is PKR5,050. The government aims to fetch an additional PKR11 billion ($39.13 million) in revenue with the measure.

    The excise duty increase has doubled the price difference between legal and illegal cigarettes. As a result, illicit cigarette sales have skyrocketed. In the first quarter of 2023, the sale of legal cigarettes has declined by 50 percent. Pakistan now has the second-largest illicit cigarette market in Southeast Asia after Malaysia.

    Due to the declining legal sales, analysts expect the government to collect only PKR170 billion from the tobacco industry—well short of its collection target of PRK260 billion.

  • Estonia to Increase Excise on Tobacco

    Estonia to Increase Excise on Tobacco

    Image: Tobacco Reporter archive

    Estonia’s incoming government plans to increase the excise duty on tobacco and alcohol products, but the rate has not yet been released, according to The Baltic Times.

    “The coalition partners have agreed upon a slow yearly growth, and a proposal by the finance minister is expected regarding concrete rates,” said Merlyn Sade, head of communications at the Social Democratic Party. 

    Mart Vorklaev, the Reform Party’s finance minister designate, said that it has been agreed upon that the taxation of health-related risk-taking behavior would continue and that an increase needs to be avoided in cross-border trade.

    “It should also be a part of the tax package that’s planned to be brought into the Riigikogu during the spring session,” Vorklaev said. “We will try to adhere to the principle that tax changes be known six months before they enter into effect, and we’ll also monitor our neighboring states’ tax rates to prevent cross-border trade.” 

    “The difference in excise duties with Latvia is small at present,” said Sven Sulga, Distillery Moe OU sales manager. “If Latvia doesn’t increase its duty rate, people might not go to Latvia [to buy alcohol] in the first year, but they will start doing it after that. Looking at all the incoming taxes, however, I think people will go to Latvia out of spite.” 

    “It would definitely be interesting to know how the state plans to avoid, in the case of products subject to high excise duties, a future scenario where the same goods can be obtained at a cheaper price from our neighboring countries and the Estonian taxpayer decides to take their money there instead,” said Kristina Mustonen, CEO of Maxima Estonia. “I am of the opinion that the increase in excise duty rates will boost alcohol tourism once more, and trade near the border will gain impetus for the benefit of our neighboring state’s budget.” 

  • Fines and Jail for Undeclared Manufacture

    Fines and Jail for Undeclared Manufacture

    Image: MasterSergeant | Adobe Stock

    A Belgian court handed out fines and prison sentences to several companies and individuals for undeclared cigarette manufacturing, reports The Brussels Times.

    The illegal cigarettes were manufactured and stored in a warehouse in Gosselies that was placed under surveillance in 2022. Another warehouse was discovered in a furniture factory in Anderlecht.

    A truck carrying 16 pallets of undeclared cigarettes manufactured in Belgium was checked near Jabbeke.

    The company running the Gosselies manufacturing was fined €36,710,000 ($39,580,338), and its head was also fined that amount as well as receiving a one-year prison sentence.

    Another company was fined €36,710,000 along with a suspended prison sentence for the amount exceeding €36,600,000. All manufacturing and transport equipment was confiscated.

    The other accused were fined €36,710,000 and received suspended prison sentences of six months, nine months and two years for the amount exceeding €36,600,000.

  • Vape Tax Collections Less than Envisioned

    Vape Tax Collections Less than Envisioned

    Photo: Fitri Ridzuan

    The total tax revenue collected by U.S. states and local governments from the vaping sector remains only a fraction of that extracted from traditional tobacco products, according to a new report published by KBRA.

    Vaping devices have gained popularity in recent years, largely due to health concerns around traditional cigarettes, smoking cessation initiatives and rising youth consumption. U.S. product sales for e-cigarettes are estimated at $7.4 billion annually. Capitalizing on this trend, many states and local governments have implemented taxes on these tobacco alternatives.

    Despite high expectations, the total tax revenue from these products remains small relative to tobacco taxes—and even smaller as a percentage of budget. This KBRA report provides an overview of the e-cigarette/vape market, examines different forms of taxation by state, and assesses the limitations of these taxes in bolstering state budgets, as well as the possibility for future federal regulation.

    Key findings of the report include:

    • While the number of states that have implemented e-cigarette and vape device taxes has grown, these tax revenues represent only a small fraction of the traditional cigarette market size. Vaping tax collections still contribute a negligible percentage of current governmental revenues for U.S. states.
    • Taxation methods vary among states and localities due to the uniqueness of vaping and tobacco alternative products.
    • While a vapor excise tax regime could provide additional sources of revenue for states and localities, there are concerns surrounding states relying on these revenues as long-term solutions to close their budget gaps.
    • Increased federal regulations on vapor products, as well as the implementation of a federal excise tax, are probable in the years to come, which could potentially curb usage and associated tax revenue collections at the state level.

     

  • U.K. Tobacco Duty Increased

    U.K. Tobacco Duty Increased

    Image: weyo | Adobe Stock

    Chancellor Jeremy Hunt raised the U.K. tobacco duty in his spring budget, reports The Independent. A 20-pack of cigarettes will now cost more than £14 ($16.86).

    The cigarette tax increased by 10.1 percent in line with the retail price index plus an additional 2 percent.

    Hand-rolling tobacco will increase by 10.1 percent plus an additional 6 percent.

    Smokers-rights activists were aghast.

    “Punishing smokers for their habit during a cost-of-living crisis is heartless and cruel,” said Simon Clark, director of the smokers’ campaign group Forest. “It discriminates against poorer smokers and will drive many more consumers to the black market.

    “This is bad news for legitimate, law-abiding retailers and bad news for the Treasury, which could lose billions of pounds in revenue if more smokers buy their tobacco from illicit traders.”

    The last cigarette price increase was in October 2021.

    The price increase is part of the effort to make the U.K. smoke-free by 2030.

    Alcohol taxes are also set to increase with inflation.

  • Congress to Close E-Cigarette Ad Loophole

    Congress to Close E-Cigarette Ad Loophole

    Image: higyou | Adobe Stock

    The U.S. Congress wants to end a legislative provision that allows manufacturers to claim federal tax deductions for the cost of advertising for e-cigarettes and tobacco products. That includes the ads they buy on the radio.

    Senators Jeanne Shaheen and Richard Blumenthal have reintroduced the No Tax Subsidies for E-Cigarette and Tobacco Ads Act (S. 464), which if passed would not make the direct-to-consumer ads illegal but would end the ability for companies to take tax deductions for advertising expenses related to vaping and other tobacco products, according to Insider Radio.

    “Tax breaks for tobacco and e-cigarette giants allow the industry to profit from its manipulative marketing,” Blumenthal said. “Our legislation ends these write-offs to protect kids and other consumers from being lured into lifetimes of addiction.”

    Radio and television advertising for traditional tobacco products has been banned under federal law since January 1971, and certain other forms of tobacco advertising are restricted under the 1998 Tobacco Master Settlement Agreement. However, none of these restrictions apply to e-cigarettes. 

  • Forest Urges Freeze on U.K. Tobacco Duty

    Forest Urges Freeze on U.K. Tobacco Duty

    Photo: John Gomez

    Smokers’ rights group Forest is urging the U.K. government to freeze excise duty on tobacco in its March 15 budget after a poll found that almost two thirds of respondents (65 percent) believe the tax on tobacco in the United Kingdom is already “about right” (38 percent) or “too high” (27 percent).

    Only one in five (20 percent) of those asked think the tax on tobacco is “too low,” while 15 percent said they “don’t know.”

    Conducted on behalf of Forest by Yonder, the poll follows a recent report that the cost of a pack of cigarettes could go up by £1.15 ($1.36) after the Budget, while a 30-gram pouch of hand-rolled tobacco could rise by £2, if Chancellor Jeremy Hunt decides to stick with the annual tobacco escalator of inflation plus 2 percent.

    The poll also found that 62 percent of adults think that purchasing tobacco from the black market is an “understandable” response given the high cost of tobacco sold legally in the United Kingdom whereas only 22 percent of respondents believe this is not an “understandable” response. Sixteen percent said they “don’t know.”

    The Chancellor should freeze duty on tobacco and give smokers a break.

    Simon Clark, director, Forest

    According to the survey, Brits also believe that the government has more pressing concerns than tackling smoking.

    Asked to consider a list of 10 issues for the government to address in 2023, respondents said tackling the rising cost of household utilities such as electricity and gas is the most important priority (54 percent), followed by improving the health service by providing more beds, frontline staff and cutting waiting lists (48 percent), tackling inflation (40 percent), and addressing care for the elderly (32 percent).

    Other top priorities included tackling climate change (28 percent), the housing shortage (26 percent), and helping businesses recover from the impact of the pandemic (17 percent).

    Tackling smoking was bottom of the list (10 percent), alongside tackling obesity (10 percent), and tackling misuse of alcohol (9 percent).

    “The chancellor should freeze duty on tobacco and give smokers a break,” said Forest Director Simon Clark.

    “Raising the tax on tobacco not only discriminates against poorer smokers, it will drive more consumers to the unregulated black market.

    “This is bad news for legitimate retailers and bad news for the Treasury which could lose billions of pounds in revenue if more consumers buy their tobacco from illicit traders.”

    “Significantly, there is very little stigma attached to buying tobacco on the black market. In a cost of living crisis the public understands that many consumers will opt for the cheaper option, even if it’s illegal.”

  • A Taxing Issue

    A Taxing Issue

    The uncertainty surrounding the EU unmanufactured tobacco tax is making it increasingly difficult for logistics companies to operate with a sense of security. Photo: Taco Tuinstra

    Freight forwarders struggle with uncertainty as the EU debates whether to tax unmanufactured tobacco.

    By George Gay

    Erik Van Neuten

    Shortly after Erik Van Nueten, a director of Andromeda Tobacco Forwarding and Logistics, joined the Andromeda group in 2006, Tobacco Reporter ran a story on the company’s tobacco division headlined “Outsourcing the hassle.” The heading, which sprang from a comment by Van Nueten, referenced the fact that the company’s tobacco-trader clients could concentrate on what they were good at, buying and selling tobacco, while leaving the rest—the hassle—to Andromeda, the rest being worldwide services such as handling, storage, pest control, transportation, repacking, relabeling, sampling, sample dispatch and the not-inconsiderable associated paperwork.

    Unfortunately for Andromeda, and other companies working in tobacco logistics, while the hassle factor in 2006 was challenging enough, it has increased hugely during the past three years, particularly in the EU, where it might be raised to yet another level in the future.

    It would be crass to describe the Covid pandemic as having been a hassle, because it was and is a tragedy that has taken the lives of millions of people worldwide, that is still taking lives and that has caused major economic damage that, for most people, has meant many and greater hardships. Nevertheless, looked at purely from the point of view of tobacco logistics, Covid has been a hassle, though one that is fading. During a telephone interview toward the end of January, Van Nueten told me, for instance, that the availability of ships and containers was improving and that shipping rates, while still relatively expensive compared with those being charged two years to three years ago, were coming down slowly to acceptable levels, albeit from the ridiculously high levels ushered in by Covid.

    That seems to be the good news. The bad news is that, for various reasons, those shipping rates are unlikely to return to close to where they were.

    Taxing Unmanufactured Tobacco

    In the EU, in parallel with the Covid pandemic but not connected with it, another issue has been brewing during the past three years and more. Van Nueten told me the European Commission was discussing whether unmanufactured tobacco (UT), which is the main tobacco commodity Andromeda deals with and the only tobacco commodity it deals with in the EU, should be subject to excise tax. No proposal has yet been put forward, nor is it known when this might happen. The commission has been reviewing the EU Tobacco Excise Directive (2011/64/EU) and was scheduled to publish proposals in December. But I was told that publication is unlikely during the first half of this year and that, given any decision would require unanimity among member states, discussions could stretch the time frame for any implementation.

    As I understand things, in part at least, the commission wants to include UT within the scope of the excise directive so as to be able to include it also within the scope of its Excise Movement and Control System, which is the computerized system it uses to monitor the movement of excise goods within the EU. I am told that, to achieve such inclusion, the commission needs to create a new fiscal category for UT with a dedicated tax rate. Apparently, the commission could propose a zero percent tax rate for UT, but, even if it did, because the directive provides for only a harmonized minimum level of tobacco taxes throughout member states, individual states could choose to apply higher tax rates.

    And it is at this point that these deliberations seem to collide with business reality. The sorts of uncertainties inherent in the current situation, which have already taken root in the EU, mean it is becoming increasingly difficult for Andromeda and other companies working in the field of logistics to operate with a sense of security. Although Van Nueten would prefer to see the traditional system retained with excise applied to tobacco products, he said the logistics industry could, given time, adapt to a new system. What was difficult was the present situation, which was unclear and made transporting tobacco through the EU frustrating and risky.

    Although Brussels is still discussing whether to subject unmanufactured tobacco to excise tax, some states have already acted as if such a provision exists.

    A Matter of Definition

    Although Brussels is still discussing whether to propose the inclusion of UT within the scope of the EU excise directive and thereby allow member states that wished to do so to tax UT, some states have already acted as if such a provision existed. I was told by somebody who didn’t want to be named that, during the past 18 months or so, two trucks containing UT were stolen in separate incidents while in transit within the EU and that the companies that had issued the original customs documents for the tobacco were held liable for import duties, excise and VAT, an amount thought to be in the region of €4.6 million ($4.95 million) per truck. I later learned that these were not altogether isolated cases.

    These incidents, which seem quite alarming within a region that is supposed to boast a harmonized tobacco tax regime within a single market, probably have their roots in a 2017 EU Court of Justice case involving Eko-Tabak and Generalni reditelstvi cel (General Directorate of Customs, Czech Republic) in which the court was asked to consider the confiscation of goods belonging to the former, which the latter had ruled to be manufactured tobacco subject to excise duty. The case basically involved the definition of “smoking tobacco” within the EU directive, which the court ruled had to be broad and to take into account whether the tobacco could be smoked after simple processing by means of crushing or hand-cutting.

    As a result of this ruling, and despite the fact that the directive applies only to manufactured products, some member states started considering some UT to come within the court’s definition and therefore be subject to excise tax. And clearly, for as long as some states continue to consider UT to be taxable and others don’t, those responsible for transporting tobacco within the EU are going to suffer. Under current arrangements, taxable goods intended for transit need to have special documentation raised by authorized entities in the country of shipment that is then cleared in the country of destination upon arrival. This seems to indicate that if UT were sent from country A, where excise was applied to such a product, to country B, where no such excise was applied, the arrival could not be cleared. And if the tobacco were to be sent in the other direction, no documents could be raised in country B though they would be required in country A.

    Probably, I guess, there would be administrative tricks that could get around these problems in the short term, and hopefully they will disappear with the proposals put forward by the commission in revising the excise directive, which will hopefully include those aimed at reinvigorating the concept of a harmonized market, in part by tightening up the definition of UT.

    What to Do?

    Nevertheless, two major questions seem to arise. What are logistics companies expected to do in the meantime? There have to be some interim arrangements that mean they can operate efficiently, secure in the knowledge that what they are doing is within the rules.

    The other question has to address why a system that seems to have been working well should be changed. Well, the answer in some people’s eyes seems to be that the court ruling provided a necessity for change—change that would ensure that member states got their cut, though they don’t put it quite like that. Such change would address the problem caused when UT is stolen during transit through the EU, taken to an illicit factory and ends up as a product in the illegal trade, without taxes having been paid on either the unmanufactured or manufactured tobacco.

    In turn, such a way of looking at things raises at least a couple of interesting issues. Firstly, it seems to cast doubt on the idea that the EU, through such initiatives, is pursuing illegal traders at least partly because of health concerns for those who might smoke illicit cigarettes. At its base, the idea is about taxing the tobacco whether or not it gets into the hands of the illegal market; it is about revenue. The other issue is that applying excise to UT could be seen as partly legitimizing the activities of illicit manufacturers. If such a manufacturer steals a truck of UT on which taxes have been paid or are due and turns it into products, those products, I guess, enter the market as excise paid. Even the theft might be disputed by a smart lawyer willing to claim the tobacco fell off the back of a truck.

    It seems to me that we are again being driven toward ridiculously complex reactions because of an unwillingness to trace a problem back to its cause—unfair levels of taxes being applied to combustible cigarettes. If the aim is to reduce the illegal trade in cigarettes, significantly reduce the taxes on them and remove laws requiring licit cigarettes to be unappealing while heavily promoting alternative, low-risk products.

    *While acknowledging that all opinions and errors in this piece are his, the writer would like to thank the following for their help in explaining some of the background and intricacies associated with the commission’s discussions on tobacco excise: William Meyer, senior EU affairs manager, and Peter van der Mark, secretary general at the European Smoking Tobacco Association.

    A Rational Approach: Controlled Atmosphere Systems are Gaining Traction in the Fight Against Tobacco Pests

    In the main article accompanying this sidebar, I finish with my usual rant on what I see as the absurd complexities smuggled into efforts to reduce the illegal trade in tobacco products. So, as a way of introducing some balance, in this piece I would like to contrast such efforts with those being used to combat another problem in which rogue players cause economic damage along the tobacco supply chain. It seems to me that the tobacco industry has in recent years approached the issue of tobacco losses to insects in a rational, proportionate and evolving manner.

    That’s not to say everything has been fixed. It hasn’t, and new problems could arise in the future, as those who have read the companion piece might suspect. If, as seems possible, excise taxes are applied to unmanufactured tobacco in the EU, there will be an even greater incentive for protecting tobacco. Otherwise, tobacco beetles and moths will not only be eating their way through tobacco but also through the excise paid on that tobacco. And while bureaucrats seem keen on complexity, I think they will draw the line at issuing excise rebates on receipt of evidence provided in the form of well-fed beetles.

    Ten years ago, it was said that tobacco worth about $800 million was being lost annually to insects, and so, in an email exchange at the end of January, I asked Rene Luyten, a director of b-Cat, whether the situation had improved or deteriorated since then. He replied that he had no idea about the value of losses but added that he knew that tobacco owners did not sit back and allow problems to overwhelm them. They were always looking to improve the way they protected their tobacco from insects, and that was irrespective of the costs of producing tobacco at any particular time.

    One of the improvements that was made saw, in 2011, controlled atmosphere (CA) systems, which had been used in respect of other commodities and various products for 15 years or more, starting to gain traction with tobacco people—those involved in warehousing, shipping, trading and manufacturing tobacco. Further impetus was provided in 2012 when Coresta issued a guideline for the treatment of tobacco beetles with CA, a guideline that was revised to include the tobacco moths the following year. Used properly, CA offers enormous benefits because it kills all tobacco beetles and moths in all their life cycle stages; it can be used for all types and varieties of leaf tobacco without affecting taste and color, and it can be used for tobacco products.

    Luyten told me that demand for new CA chambers was currently good around the world, as was demand for extensions of installations made previously by some of the early adopters of this technology. And demand is coming from both large and small companies because installations can be geared to the size of the business. On the modest end of the scale, b-Cat, which has been involved in the CA business for more than 50 years, has installed a system with the dimensions of a single 40-foot container while at the other end of the scale it has built a system with a capacity of 63 40-foot containers spread through nine chambers.

    Of course, many leaf tobacco export countries still use chemical insect treatments, mainly because of the high volumes they need to handle and the resulting costs. But because of issues to do with insect resistance to phosphine gas treatments, which became such a huge problem before the adoption of CA systems, manufacturers tend to use CA as the final treatment adjacent to their manufacturing sites. They also tend to favor CA treatments because of issues concerned with the environment and sustainability, issues that drive the part of the continuing R&D effort at b-Cat that is aimed at automating processes so as to minimize energy usage. —G.G.

    George Gay is Tobacco Reporter’s European editor, but his territory spans the globe. Based in London, George has covered the tobacco industry since 1982, initially for a U.K.-based publication and since 2004 for Tobacco Reporter. George’s understanding of industry issues, combined with his keen sense of observation and dry wit, have earned him a loyal following among Tobacco Reporter’s readers.
  • Hong Kong Hikes Cigarette Prices

    Hong Kong Hikes Cigarette Prices

    Photo: B Photography

    The average price of a pack of cigarettes in Hong Kong increased to HKD73.75 ($9.40) on Feb. 22, following a 31 percent tax hike, reports the South China Morning Post.

    With the increase, the city government aims to boost its coffers and cut the number of smokers by 100,000 in the next three years.

    “Increasing tobacco duty is recognized internationally as the most effective means to reduce tobacco use,” Financial Secretary Paul Chan Mo-po said in his budget speech. “A rise in cigarette price will increase the incentive of smokers to reduce or quit smoking.” 

    The government estimates the price increase would bring in an extra HKD1 billion a year in revenue. 

    The prevalence of smoking in Hong Kong has dropped from 23.3 percent of the population in 1982 to 9.5 percent at present. With the new measure, authorities hope to bring the figure down to 7.8 percent by 2025, or reduce the number of smokers from about 580,000 to 480,000. 

    Tobacco taxes now account for 68 percent of the pack price. This is higher than the 62 percent prior to the tax hike but still lower than the 75 percent rate recommended by the World Health Organization. 

    By comparison, tax makes up 67.1 percent of the price of a pack of cigarettes in Singapore, 73.9 percent in Australia and 82 percent in New Zealand, according to figures from 2020. 

    A government representative said that an increase in tobacco tax had led to more inquiries to the Department of Health’s smoking cessation hotline in the past. After the tobacco tax was raised by 50 percent in 2009, calls to the hotline rose by 257 percent.