Opportunities and threats of the excise tax harmonization in the EU

– Latvia’s approach

Māris JurušsDeputy Director

Tax Policy DepartmentMinistry of Finance of Latvia

20.09.2006PRAGUE

The main requirements of EU

• The minimum excise tax rate: 57% of the most popular price category (MPPC) and not less then EUR 64 per 1000 cigarettes

• Combined excise tax rate: specific + ad valorem. The ad valorem rate is applied on retail price

• Equal excise tax rate for all cigarettes

• Fixing of maximum retail price (MRP)

• Minimum tax (optional)

Retail Price Structure (EU directives)

Manufacture Price

Trade Margin

Specific Excise

Ad Valorem Excise

VAT

100%

> 15%

5% -55% of total taxation

>57% of MPPC, > EUR 64

< 90% of Retail Price

Retail Price Structure (EU directives)

Harmonisation of excise tax on cigarettes in Latvia with EU requirements

• 1st step: 01.01.1999 Introduction of general EU requirements (tax warehouses, suspended tax payment procedure, guarantees etc).

• 2nd step: 2001 - 2003Introduction of equal excise tax rates. Introduction of combined tax rate. Introduction of MRP system.

• 3rd step: 2003 - 2010Gradual increase of excise tax rate to the minimum EU level: 57% of MPPC and not less then EUR 64 per 1000 cigarettes.

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Harmonization of excise taxwith EU requirements

2002 2003 2004 2005 2006

Excise tax, % no MPPC 30% 37% 41% 45% 49%

Currently established annual increase of excise tax on cigarettes

  2006 2007 2008 2009 2010

 

Specific rate, 7,6(10,92)

8,4 (12,07)

9,3(13,36)

10,5(15,08)

17,8(25,57)

LVL (EUR) per 1000 cigarettes

Ad valorem, % of MRP

14,8 19,2 23,5 27,9 32,2

Expected MPPC

2006 2007 2008 2009 2010

MPPC, EUR per 20 cig. 0,63 0,81 0,93 1,10 1,66

Opportunities of the harmonization of the excise tax in Latvia

• Fiscal aspects:– yearly excise duty revenue increase:

• in 2004: 20 Milo. EUR• in 2005: 30 Milo. EUR• in the first half of 2006: 18 Milo. EUR• about 90 -100 Milo. EUR in 2010

– more option for budget programmes

• Social / health aspects:– decreasing of consumption– decreasing of smoking

Threats of the harmonization of the excise tax in Latvia

• Smuggling– in 2005 arrested 7,36 Milo. units of cigarettes and 24,4 tons of

tobacco;– in the first half of 2006 arrested 18,93 Milo. units of cigarettes;

• Alternative products to cigarettes (smoking tobacco)• Excise tax rates in neighbouring countries

– in Russia: 0,046 EUR per 20 cig.+8% (or 5-7 times less than in Latvia)

– in Belarus: 0,036 EUR per 20 cig. (or 9 times less than in Latvia)

• Inflation – in 2005: 6,7% ( 0,28 pp from tobacco products)– in the first half of 2006: 6,3% (0,21 pp from tobacco products)

Changes in exchange rate of national currency - lats (LVL) 2002 – 2005

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Excise tax harmonization

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0,340,43

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0,50

1,00

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3,00

2002 2003 2004 2005 2006 2007 2008 2009 2010

Pri

ce a

nd

Exc

ise

Tax

, EU

R p

er 1

000

cig

aret

tes

Excise tax (present plan), EUR per 20 cig. EU minimum, EUR per 20 cig.

due to exchange rate changes 2003- 2005 curent planed tax rate increase is not enough sufficient

Excise tax harmonization Option 1

0,17 0,18 0,210,27

0,340,43

0,55

0,70

1,01

1,28 1,28 1,28

0,00

0,50

1,00

1,50

2,00

2,50

3,00

2002 2003 2004 2005 2006 2007 2008 2009 2010

Pri

ce a

nd

Exc

ise

Tax

, EU

R p

er 1

000

cig

aret

tes

Excise tax (present plan), EUR per 20 cig.

EU minimum, EUR per 20 cig.

Excise tax harmonization (option 1) , EUR per 20 cig.

Option 1More faster increase

Excise tax harmonizationOption 2

0,17 0,18 0,210,27

0,340,43

0,55

0,70

1,01

1,28 1,28 1,28 1,28 1,28 1,28

0,00

0,50

1,00

1,50

2,00

2,50

3,00

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pri

ce a

nd

Exc

ise

Tax

, EU

R p

er 1

000

cig

aret

tes

Excise tax (present plan), EUR per 20 cig.

EU minimum, EUR per 20 cig.

Excise tax harmonization (option 2) , EUR per 20 cig.

Option 2to prolong tranzitonal

period and keep approx. the same annual growth

Further harmonization of the excise tax – Latvia’s approach

• Depends on:– Economical situation– Inflation rate– Situation in market– Smuggling activities

• Further activities:– Report to the government– Negotiation with the Commission

Thank you for

your attention!