The European Business Association (EBA), the American Chamber of Commerce in Ukraine (AmCham) and the Association of Tobacco Manufacturers “Ukrtobacco” have appealed to the Verkhovna Rada to support in the second reading the draft law No. 11090 on increasing the excise tax on tobacco products as proposed by the Cabinet of Ministers.
“It is necessary to provide for the EU’s approach to determining a single euro to hryvnia exchange rate throughout the year (as of October 1 of the previous year for the entire next year) in order to ensure business planning for enterprises that are the largest taxpayers in Ukraine, which, according to the official opinion to the draft law and relevant letters, is insisted on by both the Rada Committee on Ukraine’s Integration into the EU and the Government Office for Coordination of European and Euro-Atlantic Integration of the Cabinet of Ministers,” the second version of the draft law reads on the EBA website.
The associations are confident that the initiatives of some Ukrainian MPs to introduce conceptual changes to the decision already adopted in the first reading to change the excise tax rates on tobacco products pose significant risks to the State Budget of Ukraine. These proposals could provoke a galloping growth of the illegal cigarette market, which has been reduced with extraordinary efforts for several months, taking into account the recommendations of the G7 countries and the leadership of the Chairman of the Parliamentary Financial Committee Danylo Hetmantsev.
The most critical and risky initiatives, according to the member companies, are the proposals to establish an ad valorem excise tax on tobacco products at 25% and to compare the tax rate for cigarettes and electrically heated tobacco products (EHT).
It is emphasized that such an initiative does not comply with the European approach and the practice of EU member states.
“Please take into account the position of the united business community when making the final decision on the revision of excise tax rates on tobacco products as part of the further consideration and adoption of Draft Law 11090,” the association summarized.
Earlier, the Union of Ukrainian Entrepreneurs (UUE) and the U.S.-Ukraine Business Council (USUBC) called for the adoption of the draft law on tobacco excise taxes in the version of the Cabinet of Ministers.
As reported, on June 4, the Verkhovna Rada supported in the first reading and adopted as a basis the draft law No. 11090 on increasing the excise tax on tobacco products.
The draft law provides for the conversion of excise tax rates on tobacco products from hryvnia to euros, reaching the EU minimum excise tax level on cigarettes (EUR90 per 1000 cigarettes) through a gradual increase in specific excise tax rates by 2028, returning to the differentiation of excise tax on HTPs and cigarettes, and introducing a special mechanism for calculating excise tax on tobacco products based on the exchange rate.
According to the estimates of the Ministry of Finance described in the draft Budget Declaration, this will increase state budget revenues by UAH 0.6 billion in 2025, by UAH 5 billion in 2026, by UAH 9.4 billion in 2027 and by UAH 13.9 billion in 2028.
The working group under the Verkhovna Rada Committee on Finance, Tax and Customs Policy considered the bill on increasing excise duties on tobacco, which is preparing for consideration by Parliament in the second reading, said the head of the parliamentary committee Daniil Getmantsev.
“The bill is unambiguously timely and will be supported by the Verkhovna Rada. At the same time there are issues that should be considered in the second reading. Realized by the deputies in the hall. Among them the schedule for increasing excise tax rates, their size on certain items and increase in ad valorem rate,” – he wrote in Telegram on Monday.
In addition, according to Getmantsev, there are several other technical issues to the text of the bill to increase excise taxes on tobacco products. The deputies intend to find consensus on them at the level of the parliamentary committee.
Getmantsev also said that the bill adopted in 2020 on the introduction of excise tax on tobacco-containing products for electric heating (TIEN) helped the state to get to date 22.5 billion UAH.
“A good result”, – summarized the head of the Finance Committee.
As reported, the European Business Association strongly opposes the amendments to the Tax Code of Ukraine on revision of excise tax rates on tobacco products (draft law No. 11090), which is being considered in connection with the requirements of the EU Council Directive on the structure and rates of excise taxes applicable to tobacco products.
The revision of excise tax rates on tobacco products already from July 1, 2024 is not in line with the principle of stability of tax legislation, the EBA argued.
The experts drew attention to the fact that the excise tax rates on tobacco products are scheduled to increase by 20% annually for 2024-2027. However, the draft law No. 11090 proposes to increase these rates unevenly. For example, it is proposed to increase the excise tax rate on cigarettes in 2025 by almost 23.5%, and in 2026 and 2027 – by about 5% annually. According to business representatives, such an approach would have a shock effect on the market in 2025.
Meanwhile, member companies support a differentiated schedule of excise tax rate increases for cigarettes and tobacco products for electronic heating with an electronically controlled heater over 2024-2027.
On March 12, the NGO “Life” together with researchers from the Kyiv International Institute of Sociology (KIIS) presented the results of the all-Ukrainian survey “Use of Tobacco and Nicotine Products and Attitudes Towards Anti-Tobacco Measures” conducted in November-December 2023 as part of the regular Omnibus.
According to the survey, 30% of the population in Ukraine currently use tobacco or nicotine products: 43% of men and 20% of women. Daily smokers account for 24.5% of Ukrainians (36% of men, 15% of women).
Surveys show that consumption of tobacco products in Ukraine was actively declining until 2017. However, after the introduction of aggressive advertising of heating tobacco products, e-cigarettes and nicotine products, consumption of tobacco products in Ukraine has not decreased for 7 years. If we look at the structure of smoking, the consumption of tobacco and nicotine products among Ukrainian women has doubled in 7 years. According to the GATS survey, in 2017, 7% of Ukrainian women were daily tobacco users and 1% of e-cigarettes users, and today this figure is 15%. Tobacco and nicotine use is most widespread among young women aged 18-29 years – 37%, of whom 28.4% use it daily and 8.4% use it occasionally. This means that one in three young women is currently addicted to nicotine.
Among daily users, 79% smoke manufactured cigarettes. This is followed by electrically heated tobacco products (18%) and e-cigarettes (14%). The use of HTPs and e-cigarettes is more common among younger respondents: 37% of young people aged 18-29 use electrically heated tobacco products, and 36% use e-cigarettes. Women are more likely than men to use electrically heated tobacco products (27% vs. 13%) and e-cigarettes (25% vs. 11%).
“The survey results demonstrate a clear correlation between the answers of respondents who were most exposed to tobacco and nicotine advertising and the prevalence of use of these products among the youngest population group. Also, for the first time, we observe parity between tobacco and nicotine users among men and women in the 18-29 age group, but while the indicators for men remain stable, there has been a significant increase for the female population,” said Oleksandr Shcherbatiuk, researcher, project coordinator at the Kyiv International Institute of Sociology.
The survey showed that it is the young population that notices tobacco and nicotine advertising the most – 73% of young people aged 18-29. Further, this figure decreases with each age group and falls to 19% among respondents aged 70 and older. This confirms that tobacco and nicotine advertising is aimed at the youngest age group of men and women.
Display of tobacco and nicotine products in points of sale is the main channel for advertising these products – 32% of respondents said they notice it. Banner ads on the Internet (23%) and personal pages on social media (20%) are in second place. Outdoor advertising was seen by 14%. Most often, respondents saw ads for traditional and heated cigarettes (35%), 31% saw ads for tobacco heating devices, 24% saw ads for e-cigarettes, and 10% saw ads for nicotine snus.
“The tobacco industry is bringing back the tobacco epidemic among young people. Tobacco companies’ marketing preys on young women and men. The health of the population and, above all, children and youth is a matter of national security for the restoration of Ukraine’s human capital. Public support for anti-tobacco regulations of up to 80% is a guideline for the Verkhovna Rada of Ukraine to protect Ukrainians from tobacco and nicotine,” said Dmytro Kupyra, Executive Director of the NGO “Life”.
Most Ukrainians support anti-tobacco measures to prevent young people from starting to use tobacco.
The vast majority of respondents support the ban on advertising of brands of electronic smoking devices and e-cigarettes (79%) and the ban on the visible placement of tobacco packs in retail outlets (77%). Two-thirds of respondents support a ban on flavored tobacco products (67%) and tax increases to reduce the affordability of tobacco products for children (65%). The introduction of standardized packaging is supported by 61% of respondents.
“At the end of 2021, the Verkhovna Rada of Ukraine adopted the Anti-Tobacco Law 1978-IX, which implemented the key provisions of European Integration Directive 2014/40/EU. We can already see the results of the adopted changes with the appearance of updated health warnings on cigarette packs. Despite these efforts, the tobacco industry continues to attract young people. With the absolute support of citizens, we will propose to the Parliament the following package of proposals to protect the health of children and youth from illicit tobacco and nicotine products. First of all, it is necessary to eliminate all forms of advertising, including the visible placement of tobacco and nicotine products in points of sale, and to ban flavoring (fruit) additives that are not typical for tobacco products. Such steps are in line with the WHO Framework Convention on Tobacco Control and Ukraine’s European integration commitments,” said Lada Bulakh, MP, member of the Committee on National Health, Medical Assistance and Health Insurance.
The survey results revealed the key reasons for the spread of the tobacco and nicotine epidemic in Ukraine and demonstrated significant public support for the immediate implementation of legislative measures to protect the young population. Smoking in Ukraine is the cause of 130 thousand premature deaths annually from diseases such as heart attack, stroke, cancer and others.
As of June this year, the share of illegal tobacco products in the total market in Ukraine amounted to 19.5%, slightly down from 20.2% in February, but the share of Duty Free labeled products even slightly increased to 10.9% from 10.8%, according to the latest study “Monitoring of the Illegal Trade in Tobacco Products in Ukraine” by Kantar Ukraine.
According to Kantar’s preliminary estimates, presented this week at a roundtable organized by the American Chamber of Commerce with the participation of representatives of the US and Japanese embassies, government officials, the Ukrtyutyun Association and business, the losses of the state budget in 2023 from the illegal tobacco market are estimated at more than UAH 21 billion.
It was noted that the share of counterfeit products remained significant in June – 6.9%, while in February it was estimated at 7.9%.
At the roundtable, KPMG also presented its research on the markets for illegal tobacco products in Ukraine, the EU, the UK, Norway, Switzerland and Moldova in 2022. According to the report, Ukraine is the second largest market for the consumption of illegal tobacco products in Europe, and budget losses amounted to almost UAH 26 billion.
The roundtable participants called for intensifying efforts to combat the illegal production and trafficking of tobacco products and establishing coordination between the competent authorities. In particular, as noted in the release of the American Chamber of Commerce, it is important to adopt the necessary amendments to the legislation on criminalization of tobacco smuggling, improve mechanisms for prosecution for actions related to the illegal production and trafficking of cigarettes, and create an effective system of control over the storage and destruction of confiscated products and equipment.
It is specified that the event was attended by the member companies of the Chamber’s special platform on hard excisable goods, which in 2022 paid over UAH 78 billion in taxes: “Philip Morris Ukraine, V.A.T.-Pryluky, J.T. International Company Ukraine, and Imperial Tobacco Ukraine.
As reported, in June 2020, Kantar estimated the share of the illegal tobacco market at only 5%, but by August 2022, it reached 21.9%. At the same time, smuggling decreased from 3% to 1.8%, while counterfeit products increased from 1% to 8%, and duty-free labeled products from 2% to 12.2%.
The Cabinet of Ministers of Ukraine at a meeting on Friday roughly doubled the fee for excise tax stamps for alcoholic beverages, tobacco products and liquids used in electronic cigarettes to cover costs associated with their production, storage and sale, the Finance Ministry said.
According to its release, the stamp for alcoholic beverages went up from 16 kopecks to 35 kopecks, for tobacco, electronically heated tobacco products (TIEN) and liquids used in e-cigarettes – from 9 kopecks to about 16 kopecks.
The cost of the excise tax stamp has not changed since 2014, the Ministry of Finance pointed out.
As reported, the Verkhovna Rada in January 2023 adopted in the first reading of the Eurointegration bills № 8286 and № 8287 on the introduction of electronic excise stamps for alcoholic beverages, tobacco products and liquids used in e-cigarettes. These legislative initiatives are implemented to ensure control over the turnover of excisable products.
Ministry of Finance of Ukraine has submitted a proposal to the Cabinet of Ministers to increase the fee per excise tax stamp for alcoholic beverages to UAH 0.3205 from the current UAH 0.1926, and for tobacco products, tobacco-containing products for electric heating (TCHE) and e-cigarette liquids to UAH 0.1484 from UAH 0.091.
According to the text of the relevant government decree, which is available to the news agency Interfax-Ukraine, increase in price of excise stamps is necessary to compensate printing companies for the cost of their production and storage.
The Ministry of Finance in an explanatory memorandum to the draft decree states that the last time the cost of excise stamps for alcoholic beverages and tobacco products was revised more than 8 years ago and now their established value does not correspond to the actual cost of production.
For example, according to the stamp manufacturer, in 2022 alone, its costs for electricity for production are up 74% over 2021, 17% for heat, 107% for heating, 106% for hot water, and 6% for security.
“Prices per ton of paper in 2022, according to the commercial proposals of the National Bank of Ukraine, has already increased by more than 200%, and will increase in 2023 by at least 32.2% (since 2014, the price has increased 4.8 times),” the explanatory note to the draft resolution states.
In addition, the increase in the cost of energy and other resource components makes the issue of compensating the producer of stamps for the costs associated with their storage and sale relevant.
According to the document, 1.9 billion excise stamps for tobacco products and 0.56 billion stamps for alcoholic beverages will be produced by the end of 2022. At the same time for the first 9 months of this year 2.07 billion excise stamps were produced for the above products (2.91 billion in 2021).
Thus, the adoption of the draft decree would require next year for the Ukrainian producers and exporters of alcoholic beverages 71.6 million UAH (0.56 billion pieces * 0.1279 UAH) of additional costs, and for tobacco products – 108.3 million UAH (1.9 billion pieces * 0.057 UAH).
