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 14 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 MONITORING SYSTEM MONITORING OF SALES AND STOCKS - Cigarettes flow between manufacturers, distributers and retailers and Stock changes in the market. 800 700 633 600 500 354 441 387 377 400 381 343 338 315 437 384 282 300 255 354 311 328 287 311 200 267 246 247 241 244 229 209 209 201 202 181 100 165 147 144 129 90 101 0 Jan.09 Jun.09 Oct.09 Jan.10 Feb.09Mar.09 Apr.09May.09 July 09 Agu.09Sept.09 Nov.09 Dec.09 Feb.10Mar.10 Apr.10May.10June.10 Retailors Net Manufacturars Sales Distributors Sales Retailors Sto Source: Ministry of Finance, Turkey 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 .