Turkish Experience on Tobacco Taxation and Monitoring of Industry

TURKISH EXPERIENCE ON TOBACCO TAXATION AND MONITORING OF INDUSTRY

Seyit Ahmet BAS Deputy Undersecretary Ministry of Finance of Turkey PRESENTATION OUTLINE

 DEVELOPMENTS OF TOBACCO TAXATİON WITHIN 10 YEARS • Tax & Price Increases

- Average excise taxes

- Cigarettes prices

- Total tax burden on tobacco products • Tax burden increase

- Excise tax change & CPI indexes

- Total excise tax / Tax revenues & GNP • Changes in Registered Sales  EXCISE TAX SYSTEM CHANGES • Transition Period

- Up to 2002

- After 2002 • New System - Excise tax system - Monitoring system  FIRMS BEHAVIOUR DEVELOPMENTS OF TOBACCO TAXATİON WITHIN 10 YEARS

• Excise tax increased gradually • Prices increased gradually

Average Excise Tax & Cigarettes Prices

6.00 5.50 5.00

4.00 3.25 3.70 3.16 2.97 3.00 2.69 2.37 2.15 2.03 2.02 1.80 2.00 1.65 1.60 1.34 0.97 1.13 1.00 0.78 0.84 0.50 0.37 0.20 0.13 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 f

Average Excise (TL) Average Price (TL)

Source: Ministry of Finance, Turkey DEVELOPMENTS OF TOBACCO TAXATİON WITHIN 10 YEARS

Excise tax collection increased in nominal and real terms Tax burden increased aproximately 4.3 times in real terms

Excise Duty Collection (Billion TL) 16 15.5

11.5 12 10.9 9.6 10 8.9

8 7.1 6.1 6 4.5

4 3.0 2.4 2.4 2.4 2.0 2.0 2.1 2.3 1.1 1.6 2 0.7 0.7 0.9 0.7 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 f

Nominal Term Real Term

Source: Ministry of Finance, Turkey DEVELOPMENTS OF TOBACCO TAXATION WITHIN 10 YEARS

-Excise revenue from cigarettes increased in real term -% increases in excise revenue have been higher than the % increases in CPI

140.0 122.2 120.0

100.0

80.0 68.5 78.6

60.0 54.7 40.0 34.2 35.4 25.2 16.3 20.0 8.2 12.9 29.7 6.5 18.4 9.3 7.5 10.5 9.7 10.1 6 0.0 8.4 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 f

(%) Change in Excise (%) Change in CPI

Source: Ministry of Finance, Turkey

Within 10 years; - Total increase in Excise Revenue is 341.5% - Increases in CPI index is 203.5% DEVELOPMENTS OF TOBACCO TAXATİON WITHIN 10 YEARS

- The share of tobacco excise revenue in total tax revenue & in GDP increased more than 3 fold between 2000 &2010 . 9

8 8.0 Excise Duty / Tax Rev. (%) Excise Duty / GNP (%)

7 6.5 6.7 6.1 6 6.3 6.5 6.0 5.5 5

4 3.4 3 2.6 2 2.5 1.2 1.2 1.4 1.0 1.1 1.1 1.2 1.1 1 0.4 0.5 0.6 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 f DEVELOPMENTS OF TOBACCO TAXATİON WITHIN 10 YEARS

- 3.7% drop in registered sales, Registered sales - Around 11% drop in 2010 (forecast) % changes in sales

2 6,000 109.0% 66.0% 42.3% 0.0% 3.4% 5,800 0 -144.3% -28.5% -44.0% 5,600 -2 -178.4% -197.8% 5,400 -4 5,200 -6 5,000

-8 4,800

-10 4,600 -10.83%

4,400 -12 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 F

Source: Ministry of Finance, Turkey EXCISE TAX SYSTEM CHANGES

Before 2002, VAT + Increased VAT+ seven different types of taxes, fees and funds

Between 2002 and 2005 VAT + Excise tax Different types of ad-valorem and fixed excise taxes depending on price category, tobacco blend,

After 2005 VAT + Excise tax the ad-valorem tax with the specific tax floor.

Taxpayer: manufacturers Payment time: next month after sales. Taxbase: market price Tax base change EXCISE TAX SYSTEM CHANGES

- Fixed tax amount depending on price or tobacco blend in 2004 mislead the market.

Excise Tax System Over The Years

Average Excise Tax Tax Rate (%) Fixed Tax (TL) (TL)

2003 55,3 - 0,84 55,3 Depends on Price 1,15 2004 - I

2004 - II 28 Depends on Blend 1,10

2005 58 1,20 1,43 2006 58 1,40 1,65

2007 58 1,50 1,80

2008 58 1,55 2,02

2009 58 2,05 2,15

2010 63 2,65 3,16

Source: Ministry of Finance, Turkey EXCISE TAX SYSTEM CHANGES Security Measure: Specific Excise Tax In 2004, Competition reduced prices and tax collection, increased consumption. In 2005, the new excise system put into force, prices and tax collection increased. 6,00

Average Excise Tax & Sigarettes Prices 5,50

5,00

New excise system 4,00 3,25 3,70 3,16 2,97 3,00 2,69 2,37 2,15 2,03 2,02 2,65 1,80 2,00 1,65 1,60 1,34 2,05 0,97 1,13 1,50 1,55 1,00 0,78 1,20 1,40 0,84 0,50 0,37 0,20 0,13 0,00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 f

Average Excise (TL) Average Price (TL) Fixed Excise Tax

Source: Ministry of Finance, Turkey EXCISE TAX SYSTEM CHANGES How Turkish Excise System Works

• Specific Excise Floor, Ad Valorem Tax • Specific excise tax is determined by the government • Ad-valorem tax is calculated by multiplying ad valorem rate by the retail price • Tax liability is either specific or ad valorem whichever is higher

Tax 5,0 Fixed tax area Ad-valorem tax area 4,41 4,5 4,41 4,0 3,78 3,78 3,5 3,15 3,15 3,0 2,65 2,65 2,65 2,65 2,65 2,5 2,65 2,52 2,0 1,89 1,5

1,0 1,26 0,63 0,5

0,0 1 2 3 4 4,21 5 6 7 Ad-valorem tax (TL) Fixed tax (TL)

Price Source: Ministry of Finance, Turkey FIRMS' PRICING BEHAVIOUR AGAINST SPECIFIC EXCISE FLOOR INCREASE

Specific excise tax increased gradually by year. • It forced the retail prices of low-end price band cigarettes upwards. • Retail prices of increased by 108% between 2005 & 2009 • Retail price for high price band cigarettes increased by 43% between 2005 & 09 • The government lost some potential revenue

Low price band High price band Specific excise cigarettes cigarettes Excise Revenue /pack (TL) retail price retail price (Billion TL) 2005 1,20 1,20 3,50 7.1 2006 1,40 1,70 4,25 8.9 2007 1,50 1,90 4,60 9.6 2008 1,55 2,15 4,80 10.9 2009 2,05 2,50 5,00 11.5 5 years (%) 70,8% 108,3% 42,86% 62,1% change

Source: Ministry of Finance, Turkey MONITORING SYSTEM

 IN GENERAL In the production line and importation: banderolls applies Sale to distributors: Filing for tax purposes

Logistics: subjected to control (banderoll and tax) Sale to retailer: filing to regulatory body Subjected to control (banderoll and tax)

MANUFACTURER DISTRIBUTER RETAILER

Manufactured Sold to distributors - How many packs, - How many packs, - from which brand, - from which brand, -from which retail price -from which retail price Sold to retailors - How many packs, - from which brand, -from which retail price Bandrol system specification: MONITORING SYSTEM

 MONITORING OF PRODUCTION -Banderolls bought by manufacturers -Banderolls activated for local market and for export -Banderolls stock at manufacturers.

700 Banderoll &Production 645 600 616 571 547 577 536 519 519 513 550 498 484 506 500 483 483 465 469

400 296 300 (million unit)

200

100

0 2009 / 2 3 4 5 6 7 8 9 10 11 12 2010 / 2 3 4 5 6 7 1 1

Banderol Stocks in Manufacturars Total Production For Local Market For Export Banderols Sold

Source: Ministry of Finance, Turkey 100 200 300 400 500 600 700 800 Stock changes in the market. market. the in changes Stock - C Jan.09 0  igarettes flow between manufactur flowbetween igarettes Source: Ministry of Finance, TurkeyFinance, of Ministry Source: 384

MONITORING OF SALES OF MONITORING STOCKSAND Retailors Net Retailors Feb.09 101 287 Mar.09 90 MONITORING SYSTEM

Apr.09 311 129 381

May.09 144 315 Jun.09 165 Manufacturars Sales Manufacturars

July 09

246 343

Agu.09 247 633

Sept.09 201 282 e rs, distributrs, Oct.09

181 338

Nov.09 241 354

Dec.09 Distributors Sales Distributors 267 437 e rs andretail rs Jan.10 328 387 Feb.10 311

Mar.10 441 229 e

Apr.10 and rs 147 209 255 May.10 202 Retailors Sto Retailors June.10 209 354 377 244 FIRMS BEHAVIOUR

Firms Behaviour Against:

 Gradualy increasing fixed rate in 2004 depending on price or blend.

 Fixed tax for all between 2005-2010

 Ad-valorem rate increase in 2010

 Visual health warnings

CONCLUSION: Strengthened Excise Tax System

Ministry of Finance has a STRONG HAND because of the system;

• Ad-valorem tax with specific tax floor.

• Monitor production plans

• Monitor production for local market and export.

• Monitor every stock movement on every stage

• Know industry’s stock and tax plans