Business urges the President to return a Draft Law №1049 for revision

29/ 01/ 2020

On January 28, the meeting of the working group on the implementation of the provisions of the Memorandum between the Cabinet of Ministers of Ukraine and representatives of the tobacco industry was held to ensure stability in the tobacco market and maintain a competitive environment for all its participants. During the meeting, proposals to extend the approximation of excise duty rates to the EU level for tobacco products to the year 2030 and put forward possible solutions for combating the illegal tobacco market were discussed. According to the estimations of the EBA member companies, the illegal tobacco market had grown from 1.1% in 2016 to 7% in 2019. At the same time, losses to the state are amounted to UAH 5 billion, which are caused by the lack of excise tax. The reasons for this significant increase could be a 20% growth in rates annually, lower excise tax rates of non-EU neighboring countries, etc. Besides, it is worth noting that the Tax Code has already set a schedule for raising to the level of the European excise duty - 90 Euros per thousand pieces (by 2025), however, it has been changed twice due to indexation. It is because of such unpredictable actions that the economic attractiveness to unscrupulous market participants is growing. Therefore, to eliminate such opportunities, business emphasizes on an urgent adoption of the Plan of Measures by the Cabinet of Ministers of Ukraine in order to combat the illegal market. Given the fact that the Memorandum with the tobacco industry has been signed, and the tobacco industry fulfills its commitments, the business urges to prevent the setting of the trade margins, provided by the Draft Law No. 1049, which can lead to a drastic reduction in the legal market and a decline in legal production. Furthermore, it might result in the closure of tobacco companies and the reduction of 50,000 workplaces in the tobacco industry. Therefore, experts of the European Business Association urge the President of Ukraine Volodymyr Zelenskyi not to sign the Draft Law No. 1049 and return it to the Parliament of Ukraine with remarks on the need to exclude paragraph 2 of Section II of the Final and Transitional Provisions. Hopefully, the authorities will consider the proposals of fair businesses that pay taxes and fills the countrys budget and will not allow the deterioration of both the economy and the investment attractiveness of Ukraine as a whole. It should be reminded that owing to the Memorandum, a negotiating platform was created with the aim of repealing the amendments to the Law of Ukraine On the state regulation of production and turnover of ethyl alcohol, cognac and fruit alcohol, alcohol beverages, tobacco and fuel, which came under the transitional provisions adopted in the second reading and in the whole Draft Law of Ukraine On Amendments to Certain Laws of Ukraine on the introduction of a Single Account for Payment of Taxes and Fees, the Single Contribution to Mandatory State Social Insurance No. 1049 in the form of an amendment №8. The amendment is to set the trade margin on cigarettes for wholesale and retail trade of 7% and 13% of the maximum retail price (MRP), respectively. Manufacturers are obliged to sell cigarettes to distributors at a price not higher than 80% of the MRP. In the view of the business community, the trade margin, offered by Draft Law No. 1049, is extrinsic to countries of market economy, it is inconsistent with Ukraines GATT / WTO commitments, international pricing principles and regulation of the tobacco circulation, particularly, in the part of obligation to consider the parties interests that supply the imported goods. At the same time, it is contrary to the current legislation of Ukraine – for no other Ukrainian industries corresponding trade margins have been set yet.

During the meeting, proposals to extend the approximation of excise duty rates to the EU level for tobacco products to the year 2030 and put forward possible solutions for combating the illegal tobacco market were discussed.

According to the estimations of the EBA member companies, the illegal tobacco market had grown from 1.1% in 2016 to 7% in 2019. At the same time, losses to the state are amounted to UAH 5 billion, which are caused by the lack of excise tax. The reasons for this significant increase could be a 20% growth in rates annually, lower excise tax rates of non-EU neighboring countries, etc. Besides, it is worth noting that the Tax Code has already set a schedule for raising to the level of the European excise duty – 90 Euros per thousand pieces (by 2025), however, it has been changed twice due to indexation. It is because of such unpredictable actions that the economic attractiveness to unscrupulous market participants is growing. Therefore, to eliminate such opportunities, business emphasizes on an urgent adoption of the Plan of Measures by the Cabinet of Ministers of Ukraine in order to combat the illegal market.

Given the fact that the Memorandum with the tobacco industry has been signed, and the tobacco industry fulfills its commitments, the business urges to prevent the setting of the trade margins, provided by the Draft Law No. 1049, which can lead to a drastic reduction in the legal market and a decline in legal production. Furthermore, it might result in the closure of tobacco companies and the reduction of 50,000 workplaces in the tobacco industry. Therefore, experts of the European Business Association urge the President of Ukraine Volodymyr Zelenskyi not to sign the Draft Law No. 1049 and return it to the Parliament of Ukraine with remarks on the need to exclude paragraph 2 of Section II of the Final and Transitional Provisions.

Hopefully, the authorities will consider the proposals of fair businesses that pay taxes and fills the country’s budget and will not allow the deterioration of both the economy and the investment attractiveness of Ukraine as a whole.

It should be reminded that owing to the Memorandum, a negotiating platform was created with the aim of repealing the amendments to the Law of Ukraine “On the state regulation of production and turnover of ethyl alcohol, cognac and fruit alcohol, alcohol beverages, tobacco and fuel”, which came under the transitional provisions adopted in the second reading and in the whole Draft Law of Ukraine “On Amendments to Certain Laws of Ukraine on the introduction of a Single Account for Payment of Taxes and Fees, the Single Contribution to Mandatory State Social Insurance” No. 1049 in the form of an amendment №8.

The amendment is to set the trade margin on cigarettes for wholesale and retail trade of 7% and 13% of the maximum retail price (MRP), respectively. Manufacturers are obliged to sell cigarettes to distributors at a price not higher than 80% of the MRP.

In the view of the business community, the trade margin, offered by Draft Law No. 1049, is extrinsic to countries of market economy, it is inconsistent with Ukraine’s GATT / WTO commitments, international pricing principles and regulation of the tobacco circulation, particularly, in the part of obligation to consider the parties’ interests that supply the imported goods. At the same time, it is contrary to the current legislation of Ukraine – for no other Ukrainian industries corresponding trade margins have been set yet.