Prague, 20 September 2006 Tobacco Taxation – the case of Bulgaria Adriana Mladenova Research Economist Institute for Market Economics, Bulgaria

Prague, 20 September 2006

Tobacco Taxation – the case of Bulgaria

Adriana Mladenova

Research Economist

Institute for Market Economics, Bulgaria

www.ime.bg


EU-15 “Old Members”

All old EU member states meet the minimum requirement of 64 EUR tax per 1000 cigarettes.

Relative total tax burdens, on average, 75% of retail price, do not vary greatly between most old member states.

There are substantial differences in the absolute amounts of total tax burdens and retail prices of MPPC cigarettes.

Example:

UK: Price per pack – 7,69 EUR; tax – 3,05 EUR

Spain: Price per pack – 2,25 EUR; tax – 1,76 EUR


New member states EU-10

Only Cyprus and Malta comply with EU cigarette tax regime at present.

New member states have to increase current excise duty levels on cigarettes by between 18% (Slovenia) and 310% (Latvia).

Most countries have negotiated transition periods, but they are relatively short.Dec. 2007 – Czech Republic and Slovenia (the same as Greece and Spain)Dec. 2008 – Hungary, Poland and SlovakiaDec. 2009 – Estonia, Latvia and Lithuania


New Accession Country – Bulgaria

Bulgaria has already began increasing gradually its excise duty on cigarettes since 2002.

In 2006 it increased the excise taxes from 6.1 Euro for 1000 cigarettes + 31.8% on sale price to 7.7 Euro for 1000 c. + 48% on sale price.

As a result, the hike in retail prices of cigarettes in 2006 was 62%. The last tobacco price adjustment is scheduled for 2010 – taxes

(specific + ad valorem) will increase by 49.6%.

year 2002 2003 2004 2005 2006 2007 2008 2009 2010% 44,22 - 23,84 6,74 73,92 - - - 60,00

Contribution of increase of excise duties on tobacco to inflation in Bulgaria (Ministry of Finance estimations)


Tobacco Taxation in Bulgaria and EU

75.20%

70.03%

73.88%

77.01%

66% 68% 70% 72% 74% 76% 78%

EU-15

EU-10

Romania

Bulgaria

Excise tax incidence (as % of price)situation as at 1 July 2006


Components of tax incidence (as % of retail price)

21.09%

36.52%

15.52%

20.09%

38.63%

16.49%

22.61%

33.36%

14.07%

12.34%

48.00%

16.67%

0%

20%

40%

60%

80%

100%

EU-25 EU-15 EU-10 Bulgaria

Specific Excise Ad Valorem Excise VAT


Cigarette retail price breakdown (EUR per pack of 20 cigarettes)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

EU

-15

UK

Ireland

France

Germ

any

Danem

ark

Luxembourg

Spain

EU

-10

Malta

Cyprus

Slovenia

Hungary

Slovak R

ep

Poland

Czech R

epublic

Estonia

Lithuania

Latvia

Bulgaria

Rom

ania

Pre-tax price Overall tax burden


Aims of the EU policy in the sphere of tobacco taxation (1)

To achieve tax harmonization and uniformity – the EU requirement has not achieved harmonization of tax burdens so far, neither any significant convergence of retail selling prices in EU.

To discourage consumption of tobacco products – there is considerable substitution away from high-taxed cigarettes towards low-taxed tobacco or non-duty paid cigarettes. Also, high taxes lessen disposable income of people and discourage consumption of other goods and services.


Aims of the EU policy in the sphere of tobacco taxation (2)

To raise revenues for the government – higher taxes lead to increase in smuggling and shadow economy, which reduce the government excise and VAT revenues

To correct for negative externalities from smoking. Smokers impose costs on society such as higher expenses of treating smoking-related illness, lost of well-being and market earnings as a result of illness or death – but smokers tend to live shorter lives than non-smokers which saves on pension system and healthcare costs of age-related diseases.


Demographics of tobacco in Bulgaria

59,5% 58,8% 56,1%50,0%

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005

Trend in adult smoking prevalence in Bulgaria(ages 18-69)


Cigarette consumption - Bulgaria v.s. EU averages

-

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

Bulgaria Romania EU-25 EU-15 EU-10

0%

5%

10%

15%

20%

25%

30%

35%

Annual cigarette consumption per person

Percentage of population smoking


The business of tobacco in Bulgaria and some countries in EU

0.70%

0.74%

0.24%

0.04% 0.06%0.03%

0.06%

0.09%

0.05% 0.05%0.03%

0.00%0.07%

-

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

Gre

ece

Bu

lga

ria

Italy

Sp

ain

Po

lan

d

Fra

nce

Ro

ma

nia

Hu

ng

ary

Po

rtug

al

Slo

va

k R

ep

Be

lgiu

m

Au

stria

Cyp

rus

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

Land devoted to growing tobacco (ha) as % of total agricultural land


Policy of cigarette production in Bulgaria

Production of cigarettes in Bulgaria is under the monopoly of the state-owned Bulgartabac Holding – it has a market share of more than 90% of the cigarettes on the market.

The domestically produced cigarettes are protected by high import duties. Cigarette pricing is regulated by imposition of a minimum retail price. Tobacco producers are heavily subsidized in comparison with other

entrepreneurs – as a result tobacco production is not efficient and a lot of farmers will not receive direct payments under CAP as they fail to meet the requirement of minimum 1 hectare per farm.

Tobacco production is a subject to political games –the tobacco farmers are mainly concentrated in regions with high prevalence of Turkish ethnical population.

Control on customs is weak and corruption practices are common.


The future of the tobacco business in Bulgaria

Bulgartabac Holding has began restructuring its subsidiaries and will privatize several of its plants in the coming months.

Fixed prices on cigarettes will be abolished in October 2006 and the market will be liberalized.

Import duties on cigarettes imported from EU will be abolished due to EU accession of the country.

New market players have recently entered the market such as Philip Morris – distributor of Marlboro, British American Tobacco – distributor of Kent. Competition on the market will intensify.


Impact of Applying EU Cigarette Tax Regime in Bulgaria

1. Affordability of cigarettes decreases substantially in Bulgaria.The retail cigarette prices in Bulgaria are lower than in most of the EU members, but in real terms (cigarette prices relative to personal disposable income) they are much higher compared to EU benchmark.The increase of cigarette prices will be considerably greater than the expected growth in disposable income per capita in Bulgaria. Given the great percentage of smokers in the country, the high tax rates will have a negative impact on overall consumption and savings of people, which means less economic growth for the economy.



2. Increased smuggling, cross-border shopping and bootlegging.

Due to the hike in excise duties at the beginning of the year, Bulgaria now experiences influx of smuggled cigarettes, which the industry suggests account for more than 15% of the market. The retail prices of cigarettes are already higher than in its neighbors Romania, Serbia, Macedonia and Turkey.

Legal purchases of cigarettes in duty-free shops have risen by 24% for the first 6 months of 2006.



3. Reduction of purchases of domestic brands, which harms domestic tobacco producers and manufacturing workers.

Bulgartabac’s sales fell by 24% on an annual basis in the first half of 2006, while revenues from core operations fell by 48%.

Substitution from Bulgarian brands to imported brands – Serbian and Turkish brands are mainly preferred by Bulgarian smokers due to their price and quality characteristics.



4. Fiscal losses due to less revenues from direct and indirect taxes.

The increase of smuggling and sales in duty-free shops means less VAT and excise taxes paid to the government – in the first half of the year, revenues from excise duties accounts for 45% of the expected annual excise revenues for 2006. In comparison, all other tax revenues account for more than 50% of their annual expected levels.

Less consumption of legal cigarettes means forgone amount of VAT payments.

Losses in tobacco industry means less corporate tax payments.



5. Undermining of public confidence in the fairness of the tax system.

6. Taxes hurt the poor much harder than the rich – cigarette excise duties are discriminatory and highly regressive.



7. Privatization of the state-owned cigarette companies will be even harder in such an environment – tax harmonization impedes competition in the sector and set rules that are not in the interest of all market players.

8. Higher taxes increase incentives for fraud, bribery and corruption practices.


Smuggling of cigarettes in Europe (1995)Source: WHO, The Tobacco Atlas, 2002

http://www.who.int/tobacco/en/atlas20.pdf


Thank you for your attention!

Adriana Mladenova

Institute for Market Economics, Bulgaria

www.ime.bg

Documents

Prague, 20 September 2006 Tobacco Taxation – the case of Bulgaria Adriana Mladenova Research Economist Institute for Market Economics, Bulgaria