Philip Morris International Inc. (PMI) in 2021 reduced the shipment of its products in Ukraine by 3.3% compared to 2020 due to an increase in excise tax on these products, followed by its rise in price and an increase in the volume of illegal trade in cigarettes.
According to the PMI report, in the fourth quarter of 2021, shipments of its products to Ukraine decreased by 7.4% compared to October-December 2020, mainly due to the overall contraction of the Ukrainian tobacco market, which was partially offset by the growth of tobacco products intended for use in heat-not-burn devices.
The overall contraction of the tobacco market in Ukraine in 2021 was 9.8% compared to 2020, mainly due to an increase in product prices caused by an increase in the excise tax and in illegal trade in cigarettes.
According to the report, in general, in Eastern Europe (including Russia) in 2021, the volume of shipments of tobacco products did not change compared to 2020 and amounted to 114.35 billion units, and in the fourth quarter of last year it decreased by 4.3% – to 27.99 billion units
As reported, Philip Morris International, which includes PrJSC Philip Morris Ukraine, is one of the world’s largest manufacturers of tobacco products. It produces cigarettes in more than 50 factories and sells them in 180 countries.
The company has been operating in Ukraine for more than 20 years, owns a factory in Kharkiv region. More than 1,300 people work at the company’s enterprises.
The share of illegal tobacco products on the Ukrainian market in February-May 2021 increased by 3.1 p.p., to 15.9%, this is the maximum indicator, mainly due to the growth of illegal sales of products labeled as Duty Free, as well as those intended for export.
Such data were published by the Kantar Ukraine research institute through a survey of 3,300 adult smokers throughout the country, as well as by studying the origin of tobacco products in circulation.
According to the study, the total volume of illegally sold cigarettes since the beginning of the year, including May, amounted to 7.21 billion pieces, which led to a shortfall in the state budget of UAH 13.2 billion in tax deductions.
Kantar clarified that in May 2021 the share of counterfeit products on the Ukrainian cigarette market increased by 1.8 p.p. compared to February – up to 4.2%, the share of products labeled for Duty Free and export illegally sold in the country – by 1.3 p.p., to 8.2%, while the share of smuggled cigarettes decreased by 0.1 p.p., to 1.6%.
According to the results of the study, the average annual level of illegal sales of tobacco products in January-May 2021 increased by 2.1 times compared with the indicator for the entire 2020 – up to 14.4%. At the same time, since the beginning of this year, the share of counterfeits in the domestic cigarette market has grown by 3.1 p.p. compared to the data for 2020 – up to 5.1%, the share of products marked for Duty Free and export illegally sold in Ukraine – by 4.8 p.p., to 7.6%, while the share of smuggled cigarettes decreased by 0.5 p.p., to 1.7%.
“In addition to another growth in the volume of illegal tobacco products, another feature of 2021 is that there is a change in the distribution channels for illegal products. In 2021, three times more illegal tobacco products were sold through kiosks and stores than in 2020,” analyst from Kantar Ukraine Tetiana Sverdlyk said.
The institute clarified that 62% of tobacco products illegally sold as export or Duty Free products are marked as produced by the Vynnyky Tobacco Factory (Vynnyky, Lviv region) and are marked as not intended for sale in Ukraine. The share of unidentified manufacturers is 20%, United Tobacco LLC (Zhovti Vody, Dnipropetrovsk region) – 15%.
The most common brands of this group of illegal products are the Compliment brand marked as Duty Free – with a share of 47%, as well as those intended for export, but sold in Ukraine, namely Marshall (13%), Marvel (10%), Urta (8%) and Jin Ling (6%). The total share of these brands in this product group was 84%.
Kantar noted that 49% of smuggled cigarettes are products of Grodno Tobacco Factory (Belarus), 15% are from Moldovan factories. The most common smuggled brands are Credo, Fest, Queen, Dove, NZ, Ritm.
It is specified that 63% of illegal products are distributed in seven regions of Ukraine, most of all – in Odesa and Kharkiv (13% each), Donetsk (10%), Dnipropetrovsk (8%), Zaporizhia, Khmelnytsky and Lviv (6% each) regions.
The growth of the heated tobacco products market in 2021 has stopped after its growth by 80% in 2020. In the future the market will decline due to an increase in the excise tax on heated tobacco products by 320% from January 1, 2021, Managing Director for Ukraine of international tobacco company Philip Morris Kostas Salvaras has told Interfax-Ukraine.
“In 2020, the heated tobacco products market, according to our estimates, grew by 80%, but after the excise tax was increased by 320% from January 1, 2021 and subsequently the price grew, this indicator first slowed down a lot, and then practically stopped. According to our data, retail prices on tobacco sticks since the beginning of the year [2021] have grown by an average of UAH 13. This is not enough to compensate for even half of the increase in excise duty,” he said.
According to Philip Morris, the state budget receipts from the sale of heated tobacco products in the fourth quarter of 2021 will decrease by 60-70% compared to the same period in 2020. In addition, over the specified period, the company intends to reduce the purchase of excise duty stamps for heated tobacco products by nearly 67%.
“In addition, we have already recorded in Ukraine the first deliveries of smuggled heated tobacco products from neighboring countries, where their prices are lower. On the example of cigarettes, we see: when taxes on nicotine-containing goods grow too sharply, the level of illegal trade begins to rise rapidly. Today, 15.9% of the cigarette market is in the shadows. For comparison: in 2017 this figure was only 2.3%,” Salvaras said.
According to him, in 2021, given the current level of illegal trade in tobacco products, the state will receive less than UAH 13.2 billion in tax receipts.
Philip Morris said that an increase in the illegal trade in tobacco products may also occur in the heated tobacco products category, which will lead to a loss of government income, and smokers will not be able to switch from cigarettes to less harmful tobacco heating systems.
“For example: IQOS, our tobacco heating system, can reduce the amount of pollutants entering the smoker’s body by 90-95% compared to cigarettes. As explained by the FDA after authorization of IQOS sales on the U.S. market as a product with a modified risk, it can have a positive effect on public health in general,” the managing director of Philip Morris said.
According to the company, it proposed to the Ukrainian parliament to reconsider plans to raise excise taxes, delaying the next jump in prices for heating tobacco in the coming years.
“This is a necessary step that will allow consumers and businesses to “digest” the 320% increase and adapt to new conditions. It will also stimulate the attraction of additional investments in this area, which is important both for the country’s economy and for public health – after all, the authorities should be interested in motivating smokers to look for a less harmful alternative to cigarettes,” Salvaras said.
“Resource” bill No. 5600, which is now being considered by the Verkhovna Rada Committee on Finance, Taxation and Customs Policy, suggests an almost two-fold increase in the cost of a license for the right to wholesale trade in tobacco products in 2022 – up to UAH 975,000 (150 minimum wages), and in 2023 – three-fold, to UAH 1.49 million (230 minimum wages).
MP Nina Yuzhanina (European Solidarity faction) wrote about the initiatives introduced during the consideration of the bill on Facebook on Thursday.
“The cost of the license is untied from a fixed size and transferred to the minimum wages. Argumentation of the Ministry of Finance: today there are 109 such licensees, of which only 54 have an income of more than UAH 12 million. The rest, obviously, are used in schemes. It is not clear how this will help overcome smuggling and counterfeit in the market?” she wrote.
In addition, the proposed initiative obliges manufacturers of electric heating tobacco products to determine ceiling retail prices for these products, which will be used in calculating value added tax (VAT) and excise taxes. Also, data on ceiling retail prices will be necessary for the functioning of the new system of administration of the 5% retail excise tax, which will go to local budgets, she said.
Yuzhanina said that the amendments to the “resource” bill will improve the mechanism for preventing the accumulation of stocks by manufacturers and importers of tobacco products before the next increase in excise tax rates. If the bill is passed, this rule will be in effect from 2022.
MP Yaroslav Zhelezniak said on Telegram that the parliamentary committee began considering the bill on September 13 and plans to consider more than 11,000 amendments five hours a day.
The adoption of a bill on public health protection from tobacco exposure alone with earlier rejected and repeatedly submitted proposals for the second reading, such as a ban on the display of tobacco products at sales outlets, would increase counterfeiting, the European Business Association (EBA) has said on its website.
The association said that on July 13, 2021, at the sitting of the Verkhovna Rada Committee, it was unanimously decided to recommend the wording of bill No. 4358 on amendments to certain laws of Ukraine on public health protection from tobacco exposure of November 10, 2020, for adoption at the first and final reading by Verkhovna Rada. The EBA has repeatedly submitted proposals for bill No. 4358 and the comments were partially taken into account.
“According to the information received in the working order, some MPs-initiators of the amendments to bill No. 4358, which had been rejected by the Verkhovna Rada Committee, announced their intention to initiate discussion of such amendments during the voting of bill No. 4358 in the second reading,” the association said.
These include amendments on banning the display of tobacco products at sales outlets, as well as amendments on introducing a standardized pack for cigarettes.
“Business urges MPs to implement the requirements of Directive 2014/40/EU of the European Parliament and of the Council of 3 April 2014 without excessive regulatory burden,” the EBA said.
Attempts by the authorities to limit the list of places for the sale of alcohol and tobacco products, contained in bill No. 5805, registered on July 19 by MP Heorhiy Mazurashu (Servant of the People faction), will lead to an increase in the price of these products, and create additional financial burden for business, therefore it should be rejected, the European Business Association (EBA) said on its website on Friday.
According to the explanatory note to the document, the bill proposes to limit the sale of beer (except non-alcohol), alcohol, low-alcohol beverages, table wines, tobacco products, electronic cigarettes, liquids used in electronic cigarettes, devices for consuming tobacco products without heating them only to specialized fixed outlets (shops) where no other goods are sold than those listed above.
The association noted that this legislative initiative will require capital investments from businesses to equip separate sales outlets, which will lead to an increase in the price of legal products and an increase in the price gap between counterfeit and legal goods.
In this regard, the EBA appealed to parliamentarians with a request not to support such amendments and to reject bill No. 5805 during consideration.
“The number of official sales outlets may significantly decrease, or even disappear altogether, and thus encourage the consumption of counterfeit products. Questions are also raised about the timing of the proposed amendments. It is envisaged that the law will enter into force on the next day after its publication. Since it is physically impossible to create a place of trade in one day, this will stop the sale of alcohol and tobacco products in Ukraine for a long time,” the association said.
The EBA also notes that the proposed amendments may limit competition between business entities in the Ukrainian market. According to it, in most EU countries, there is no such experience of restricting trade in alcohol and tobacco products. In addition, there are no separate rules for regulating the sale of alcohol and tobacco products in public catering establishments.
“The bill does not take into account an assessment of financial and economic consequences of the introduction of such amendments for business and the state, for example, budget losses from a decrease in the number of licenses for retail trade in tobacco and alcohol products,” Svitlana Mykhailovska, the EBA Deputy Director for Advocacy, said.
According to her, the EBA shares the desire of the MP to minimize the impact of binge drinking and smoking on the nation’s health, but the proposed method is selective and inconsistent. In addition, the association did not see in the context of bill No. 5805 an analysis of law enforcement practice and statistical data, which would indicate the ineffectiveness and insufficiency of existing restrictions and bans on the sale of alcohol beverages and tobacco products.
