Business does not support the use of euros to calculate the excise tax rate on tobacco products

10/ 04/ 2024

The EBA experts do not support the proposal to set the euro as the monetary unit for measuring the excise tax rate on tobacco products, as proposed by the draft law On Amendments to the Tax Code of Ukraine on Revision of Excise Tax Rates on Tobacco Products No. 11090 of March 18, 2024. According to the business, other provisions of the draft law related to the increase in excise tax rates also need to be revised. The business does not see the need to set excise tax rates on tobacco products in euros, as Ukraine has no such obligation under the Association Agreement with the EU. In addition, the experience of some EU member states that have not adopted the euro, such as Poland, the Czech Republic, and Hungary, supports the idea of setting excise tax rates in national currencies. Despite the fact that the euro is currently used to set excise tax rates for such categories of excisable goods as fuel, business representatives note that fuel is a critical commodity that is sold quickly and has no limit on maximum retail prices. At the same time, it is prohibited to sell tobacco products to the final consumer at prices higher than the maximum retail prices for these goods. In addition, in the fuel component of the selling price, taxes make up a much smaller percentage of the cost, unlike the price of tobacco products, where the amount of taxes on the cost is more than 60%. According to the EBA experts, the introduction of excise tax rates in euros may result in a decrease in legal production and imports, a decrease in tax revenues to the state budget and additional growth of the shadow sector, which currently accounts for more than 25% of the market, according to Kantar Ukraine. It is worth noting that this change is proposed in parallel with a further increase in excise tax rates, as well as other legislative changes that will affect the cost of products and require significant additional costs for businesses. Additionally, the business draws attention to the inconsistency of the proposals to revise the excise tax rates in this draft law with the requirements of the EU Council Directive on the structure and rates of excise duties applicable to tobacco products. In addition, the proposal to revise the excise tax rates on tobacco products starting from July 1, 2024 does not comply with the principle of stability of tax legislation. The excise tax rates on tobacco products are scheduled to increase by 20% annually in 2024-2027. At the same time, the draft law proposes to increase these rates unevenly. For example, it is proposed to increase the excise tax rate on cigarettes by almost 23.5% in 2025, and by about 5% annually in 2026 and 2027. According to business representatives, this approach will cause a shock effect on the market in 2025. It should be noted that the EBA member companies support the differentiation of the schedule for increasing excise tax rates on cigarettes and tobacco-containing products for electronic heating with an electronically controlled heater during 2024-2027. In view of this, the EBA appealed to the Chairman of the Verkhovna Rada Committee on Finance, Taxation and Customs Policy Danylo Hetmantsev with a request to take into account the comments and suggestions provided by the business and finalize the draft law №11090 to avoid negative impact on the legal tobacco market.

The EBA experts do not support the proposal to set the euro as the monetary unit for measuring the excise tax rate on tobacco products, as proposed by the draft law “On Amendments to the Tax Code of Ukraine on Revision of Excise Tax Rates on Tobacco Products” No. 11090 of March 18, 2024. According to the business, other provisions of the draft law related to the increase in excise tax rates also need to be revised.

The business does not see the need to set excise tax rates on tobacco products in euros, as Ukraine has no such obligation under the Association Agreement with the EU. In addition, the experience of some EU member states that have not adopted the euro, such as Poland, the Czech Republic, and Hungary, supports the idea of setting excise tax rates in national currencies.

Despite the fact that the euro is currently used to set excise tax rates for such categories of excisable goods as fuel, business representatives note that fuel is a critical commodity that is sold quickly and has no limit on maximum retail prices. At the same time, it is prohibited to sell tobacco products to the final consumer at prices higher than the maximum retail prices for these goods. In addition, in the fuel component of the selling price, taxes make up a much smaller percentage of the cost, unlike the price of tobacco products, where the amount of taxes on the cost is more than 60%.

According to the EBA experts, the introduction of excise tax rates in euros may result in a decrease in legal production and imports, a decrease in tax revenues to the state budget and additional growth of the shadow sector, which currently accounts for more than 25% of the market, according to Kantar Ukraine.

It is worth noting that this change is proposed in parallel with a further increase in excise tax rates, as well as other legislative changes that will affect the cost of products and require significant additional costs for businesses.

Additionally, the business draws attention to the inconsistency of the proposals to revise the excise tax rates in this draft law with the requirements of the EU Council Directive on the structure and rates of excise duties applicable to tobacco products. In addition, the proposal to revise the excise tax rates on tobacco products starting from July 1, 2024 does not comply with the principle of stability of tax legislation.

The excise tax rates on tobacco products are scheduled to increase by 20% annually in 2024-2027. At the same time, the draft law proposes to increase these rates unevenly. For example, it is proposed to increase the excise tax rate on cigarettes by almost 23.5% in 2025, and by about 5% annually in 2026 and 2027. According to business representatives, this approach will cause a shock effect on the market in 2025.

It should be noted that the EBA member companies support the differentiation of the schedule for increasing excise tax rates on cigarettes and tobacco-containing products for electronic heating with an electronically controlled heater during 2024-2027.

In view of this, the EBA appealed to the Chairman of the Verkhovna Rada Committee on Finance, Taxation and Customs Policy Danylo Hetmantsev with a request to take into account the comments and suggestions provided by the business and finalize the draft law №11090 to avoid negative impact on the legal tobacco market.