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.
The Pivnichny (Northern) Economic Court of Appeal upheld an appeal of CJSC Philip Morris Ukraine and Philip Morris Sales and Distribution LLC in case No. 910/17723/19, canceled the decision of the Kyiv Economic Court dated August 5, 2020, and canceled the fines for a total amount of UAH 1.18 billion imposed on them in 2019 by the Antimonopoly Committee of Ukraine (AMCU). According to the court’s decision, promulgated in the unified public register of court rulings, the Pivnichny Economic Court of Appeal ruled to invalidate paragraphs 1 and 11 of AMCU decision No. 697-r dated October 10, 2019 that concern the PMI group of companies, as well as invalidate paragraphs 3 and 4 of this solution.
In addition, the court ruled to collect UAH 14,400 of court fee from the AMCU in favor of OJSC Philip Morris Ukraine (the settlement of Dokuchayevske, Kharkiv region) and Philip Morris Sales and Distribution LLC (Kyiv).
The Pivnichny Economic Court of Appeal also ruled to return the materials of case No. 910/17723/19 to the Economic Court of the city of Kyiv.
The decision of the appellate instance entered into force from the date of its awarding.
As reported, the AMCU in October 2019 imposed a fine of UAH 6.5 billion on four tobacco producers and distributor Tedis Ukraine for anticompetitive concerted actions. Later, Philip Morris Ukraine paid a fine to the AMCU in the total amount of more than UAH 1.18 billion in order to avoid the accrual of penalties, but in February 2020, PMI submitted a notification to the Ministry of Justice of Ukraine that Ukraine had violated a number of obligations under investment protection agreements.
The companies of the Philip Morris International group on December 21, 2020 also filed a claim about bilateral investment arbitration against the government of Ukraine with the International Centre for Settlement of Investment Disputes (Washington, DC, the United States) in connection with the unfair, in their opinion, decision of the Antimonopoly Committee of Ukraine (AMCU) to fine them UAH 1.2 billion in the case of the wholesale distributor Tedis Ukraine.
The Pivnichny (Northern) Economic Court of Appeal upheld an appeal of CJSC Philip Morris Ukraine and Philip Morris Sales and Distribution LLC in case No. 910/17723/19, canceled the decision of the Kyiv Economic Court dated August 5, 2020, and canceled the fines for a total amount of UAH 1.18 billion imposed on them in 2019 by the Antimonopoly Committee of Ukraine (AMCU). According to the court’s decision, promulgated in the unified public register of court rulings, the Pivnichny Economic Court of Appeal ruled to invalidate paragraphs 1 and 11 of AMCU decision No. 697-r dated October 10, 2019 that concern the PMI group of companies, as well as invalidate paragraphs 3 and 4 of this solution.
In addition, the court ruled to collect UAH 14,400 of court fee from the AMCU in favor of OJSC Philip Morris Ukraine (the settlement of Dokuchayevske, Kharkiv region) and Philip Morris Sales and Distribution LLC (Kyiv).
The Pivnichny Economic Court of Appeal also ruled to return the materials of case No. 910/17723/19 to the Economic Court of the city of Kyiv.
The decision of the appellate instance entered into force from the date of its awarding.
As reported, the AMCU in October 2019 imposed a fine of UAH 6.5 billion on four tobacco producers and distributor Tedis Ukraine for anticompetitive concerted actions. Later, Philip Morris Ukraine paid a fine to the AMCU in the total amount of more than UAH 1.18 billion in order to avoid the accrual of penalties, but in February 2020, PMI submitted a notification to the Ministry of Justice of Ukraine that Ukraine had violated a number of obligations under investment protection agreements.
The companies of the Philip Morris International group on December 21, 2020 also filed a claim about bilateral investment arbitration against the government of Ukraine with the International Centre for Settlement of Investment Disputes (Washington, DC, the United States) in connection with the unfair, in their opinion, decision of the Antimonopoly Committee of Ukraine (AMCU) to fine them UAH 1.2 billion in the case of the wholesale distributor Tedis Ukraine.
PrJSC Philip Morris Ukraine, one of the largest tobacco companies in Ukraine, in 2020 increased its net profit by 5% compared to 2019, to UAH 2.73 billion.
According to the company’s statement in the information disclosure system of the National Securities and Stock Market Commission, its assets for the year increased by 18%, to UAH 11.51 billion, and retained earnings by 55.5%, to UAH 7.79 billion.
Total debtor indebtedness over the year increased by 28.4%, to UAH 8.63 billion.
It is also indicated that at an annual meeting of shareholders on April 27, it is planned to obtain approval for the company to carry out significant transactions with an aggregate value of up to UAH 40 billion, which until April 30, 2022 can be used by the company to conduct business. In addition, during the meeting, it is planned to approve the main directions of the company’s activities, which include the further increase in production capacity and the expansion of the company’s product range.
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 over 20 years, owns a factory in Kharkiv region, and employs over 1,300 people.
The company reduced the shipment of cigarettes in Ukraine in 2020 by 4.3% compared to 2019 due to a general market decline, which was partially offset by an increase in the market share of heated tobacco products.
Philip Morris Ukraine this year predicts a decline in the legal market of heated tobacco products by 3.1 times compared to last year, to 1.5 billion pieces, due to an increase in the excise tax on these products from January 2021 by 320%, Financial Director of Philip Morris Ukraine Maksym Barabash said at a press conference in Interfax-Ukraine.
“A one-time increase in excise taxes by 320% from January 1 requires a price increase of approximately UAH 29 (for a pack of heated tobacco products), not including the price increase due to inflation and the devaluation of the hryvnia. If we transfer this price increase to consumers, the price will increase to 80-90,” he explained.
CEO of the company Kostas Salvaras said that Philip Morris Ukraine supports amendments to law No. 4278, proposing an increase in the excise tax on heated tobacco products by 200% with its further growth by 30% in 2022-2025 instead of a one-time increase by 320%. These changes in the form of amendment No. 55 were adopted in February by the parliamentary committee on finance, taxation and customs policy.
According to the calculations of Philip Morris Ukraine, a smoother increase in the excise tax will help protect the legal market, the capacity of which, if this amendment is adopted, will grow this year by 6.3% compared to 2020, to 5 billion units.
The company also expects that in the event of a gradual increase in tax, the growth of revenues to the state budget in 2021 will not be lower than UAH 4.8 billion planned by the Ministry of Finance, and UAH 6.5-7.5 billion in 2022.
Barabash clarified that a one-time increase in excise tax by 320% will lead to a 1.5-fold increase in prices for the products, and will make illegal import of heated tobacco products four times more profitable than smuggling regular cigarettes. The company’s financial director estimated the profit from the illegal import of one heated tobacco product box at $ 500-800.
In addition, according to him, the equalization of the excise tax rate for heated tobacco products and ordinary cigarettes to 320% will entail a return of users of devices for heating tobacco to cheaper and more harmful nicotine-containing products – cigarettes. He noted that this decision contradicts European practice, since on average in the EU countries the excise tax on heated tobacco products is 72% lower than the excise tax on cigarettes, while in Ukraine this figure is 28%.
Barabash clarified that a sharp increase in the excise tax on this product would jeopardize UAH 4.2 billion already invested in the development of the Ukrainian infrastructure of the IQOS brand, which employs more than 2,000 people. It will also make it impossible to localize the production of heated tobacco products in Ukraine, which could reduce the price of this product.
As reported, Philip Morris International is one of the world’s largest tobacco manufacturers. It produces cigarettes in more than 50 factories and sells them in 180 countries.
The company has been operating in Ukraine for over 20 years. In Ukraine, Philip Morris owns a factory in Kharkiv region, the company employs over 1,300 people.
In 2020, the company reduced the shipment of cigarettes in Ukraine by 4.3% compared to 2019 due to a general market decline, which was partially offset by an increase in the market share of heated tobacco products.
Philip Morris Ukraine, a large tobacco manufacturer, will soon file a motion with the International Center for Settlement of Investment Disputes (ICSID) in Washington in response to the decision of the Antimonopoly Committee of Ukraine (AMCU) on a UAH 1.2 billion fine.
“Several years ago, the Antimonopoly Committee issued permits for the concentration of a company that practically ‘swallowed’ all distribution in the tobacco market. We actually had no choice with whom to work with. What happened next? Over time, the same Antimonopoly Committee declared that we, the producers, were to blame for ‘establishing a monopoly,’ and issued a huge fine to the producers,” said the company’s CEO Kostas Salvaras in an exclusive interview with Interfax-Ukraine.
According to him, back in February, the company filed a notification to the Ministry of Justice about the violation by the state of Ukraine of a number of obligations under the investment protection agreements. “The state has expired six months for the peaceful settlement of the dispute, and we have the right to initiate arbitration proceedings directly,” Salvaras said.
“At the moment, we have already prepared an application to the International Center for the Settlement of Investment Disputes in Washington. We will submit an application shortly. We believe that we have a high chance of winning. When we win, we will be able to demand from the state not only return the fine paid by us, but also to compensate for our costs for lawyers,” said the director general of Philip Morris Ukraine.
As reported, the AMCU imposed a fine of UAH 6.5 billion for anti-competitive concerted actions on four cigarette producers, including a UAH 3.4 billion fine on the distributor Tedis Ukraine.
Later, Philip Morris Ukraine paid a fine to the AMCU for a total amount of more than UAH 1.18 billion in order to avoid the accrual of penalties.
PJSC Philip Morris Ukraine jointly with LLC Philip Morris Sales and Distribution are affiliated companies of Philip Morris International (PMI), one of the world’s largest manufacturers of tobacco products.
The company has been operating in Ukraine for over 20 years. It produces products at a factory in Kharkiv region.
In 2016, Ukraine became the seventh market in which Philip Morris launched IQOS, based on tobacco heating technology. Both affiliated companies employ over 1,300 people.
