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Economic, social, and security impacts of tobacco excise duty harmonization in the EU

Economic, social, and security impacts of tobacco excise duty harmonization in the EU Líberální Institut Conference, 20 September 2006 Prague Costs and benefits of tax harmonization – experience and expectations: Hungary Zoltan Fekete Director BGA Hungary. Background.

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Economic, social, and security impacts of tobacco excise duty harmonization in the EU

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  1. Economic, social, and security impacts of tobacco excise duty harmonization in the EU Líberální Institut Conference, 20 September 2006 Prague Costs and benefits of tax harmonization – experience and expectations: Hungary Zoltan Fekete Director BGA Hungary

  2. Background • Since 1995, BGA Hungary is the prime forum of the FMCG businesses in Hungary. • Its main activities include legislative lobbying, fighting against abusive trade practices, and promoting the case of brands and branding for consumers and policy-makers. • IPR infringement, counterfeiting, piracy, smuggling are topical issues for the industry. • In 2005, to better tackle these issues, BGA Hungary started new activities: • Budapest Economy Round-table, a series of discussions by state, industry and experts on black market, grey trade, smuggling etc; • BGA package of regulatory amendment proposals for better regulation and effective enforcement in the above issues. • Tobacco industry is heavily affected by illicit trade, smuggling, and, to a lesser extent, piracy, hence the common agenda with other packaged goods manufacturers.

  3. Illicit tobaccotrade by region Region 1: 10,3% Region 5: 39,3% Total: 20,1% 2005 Slovakia Ukraine Region 2: 8,5% Austria Romania Region 4: 30,0% Slovenia Serbia Region 3: 4,9% In 2004: 19,1% Croatia Most affected regions are along the Eastern borders. Source: BAT Hungary

  4. Illicit tobacco trade by country of origin 2004 2005 Growing illicit trade, growing inbound from Serbia. Source: BAT Hungary

  5. Illicit tobacco trade by brands Source: Illicit Trade Survey, BAT Growing illicit brand portfolio.

  6. Why to buy? Price level differences • 84% of respondents claim lower price as single decisive factor for buying. • Price competition on black market as well: avg 237 HUF price drops to 223 HUF (2004 vs 2005). Source: BAT Hungary Consumer demand is unchanged due to price level gaps.

  7. Tobacco market development MPPC tax increase %: Jun 2001 2,4% Jan 2002 Apr 2002 5,0% 4,4% Sep 2002 17,0% Feb 2003 May 2003 2,8% 17,0% Jan 2004 29,9% Sep 2003 +HUF25 May 2003 +HUF35 Jan 2003 +HUF15 Jun 2003 –HUF25 Jan 2002 +HUF20 Sep 2002 + HUF30 Jun 2001 +HUF10 Price increase: Source: BAT Hungary

  8. Estimated state revenue losses Despite a 37% tax increase, in 2004 the state revenue development drops below the 2001 level. In 2004, estimated state losses amount to 74 Bn HUF. In 2005, the legal market keeps shrinking. Source: BAT Hungary

  9. Other aspects, assumptions & conclusions • “… It is estimated that some 25% of cigarettes produced globally or more than 210 billion cigarettes (the difference between reported exports and imports) go to the black market. Of these about one third are believed to be smuggled into and within Council of Europe member States.”(Council of Europe, Organised Crime Situation Report 2004, Strasbourg, 23 December 2004) • It is the excise duty policy, that may be accounted as one decisive factor in creating or maintaining the price differences. • It is the price difference from country to country, that fuels tobacco smuggling. • It is tobacco smuggling that also fuels international crime organizations and international terrorist organizations, raising national security issues. • The shaping of national excise duty policies needs a very complex approach that takes into account all relevant aspects such as purchasing power, state revenues, national security, and health impact as well.

  10. Industry efforts & results • Constructive dialogue with policy-makers • Coordinated industry input for better regulation and effective enforcement • Continuous flow of information to support efficiency of state investigations and checks • Contribution to state enforcement especially customs (e.g. destruction of seized goods) • Promoting a complex approach relating to all main aspects (state revenues, crime issues, health issues, consumption patterns, etc) • First results • Better regulations (new competences for customs in IPR cases) • Closer state-industry collaboration (cooperation agreement between tobacco association and customs) • Significant drop in illicit trade consumer share • Volume: 11% (July 2006) vs 19% (Jan 2006) vs 20% (total 2005) • Incidence: 11% (July 2006) vs 18% (Jan 2006) vs 22% (total 2005)

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