__ /XNAR~APAPER EXCISE TAXATION OF TOBACCO PRODUCTS MARKE~1NG DEPARTMENT P,M,BINGHAM APRIL 1991 SBRET XEY AREa: EXCISE TAXIL~IOB OF TOBXCIXI DIUIDOCIS A) THE ISSUE Tobacco excise taxation is the mast significant element of the retail selling price of tobacco products and hence plays a major role in determining the commercial environment in which we qcnta~ Tn partfeular~ excise taxation determines the level of retail prices, the price structure and therefore the overall pattern of smoker demand for our products, It is also closely linked to, and significantly influences the level of profitability and cash flow performance or an Operating ( e4~~1yl Excise taxation has always been a key issue but is becoming even mate so because of increases in the level by Governwnts either for revenue or health reasons, with resultant increases in real price hPels, while eoPpeEidon, pkcticuLrly P~Xotri~, tncreasinply reek to influence the structure of the taxation in order to optimtse their competitor position in the marker place, The critical product category is cigarettes which accounts lot well over 902 of global tobacco consumptionl This pager therefore focuses upon cigarettes although there is sow reference to other tobacco prodPctsl international co·operadon and cross fertilisatfon between Governcnts is fncrcasinq vith regard to indirect taxation, u a result of uhich bath taxation levels and structures era being shaped by external intlaenecs~ Excise taxation is therefors an issue for General Wanagcment although its most direct impact is in the functions of ~dskatlng and Financsl General Managers should advise BATCol of all changes in excise structures and levelsr and disass any proposals for change with BATeo~ prior to their submission to Govf~mment~ a) WtteY To Mt~~ the cigarette excise taxation ieeue in order to errabtloh the most appropriate retail price structure whilst optinfsing profitability and cash flow over the long tea. In moat i.Yeances, long tea profit apt~isafon will a~nally result f~Q a totally or prcdominant~ specific excise taxation strpctun, in preference to an Id ~nlonm dna~ The ep~am balance keuecn seecitlc and ad Mlonn will depend upon the brand mix of each cpn~p~np~ C) STRATEGIES ~hts policl r!ll b( ac~il~d b! toou~g ppp th~ IO1~Y~.IP strategies: 1, Seek to reduce excise taxation, or to ensure that its level does O not increase at a sate greater than inflation, 9 Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 -2- 2, Po secure smaller and more frequent increases in preference to larger and only occasional increases in excise taxation, 3~ To establfsh a s;:yauce pr system of excise taxation which results in a range Je cecdil prices most appropriate to the 8~: brand dr Jhilst also optimisinq profitability over the longer term, a, To establish a method of collecting the excise which: · maximises any excise credit terms but at least ensures revenue neutrality between when payment is received from customers and when payment is made to the Governmentl - maximises the involvement of the manufacturer in the collection of excise and rpinimiscs the involvement of the distributive and retail E:a~e~· The reason for this is to retain manufacturer control over the determination of the retail price which is essential for long term profit apcimisltionl - establishes a single retail price for a brand ci~~e~ by means of a fixed retail price or a retail price agreed with the Gsvr:3men: as the basis for calculating any ad va:3tcm excise, · makes is difficult for Csvesnments to impose 'hea::S' surcharges in the future or to impose differential taxation linked to tar:nic delivery lewlsl - mini~ses the ability of competitors to underpay their excise tax and so derive a competitor advantagel 51 To secure maximum freedom to determine selling prices without Government Intervention or approval, whilst also mini~sing the ability of the retail trade to vary prices from those recommended '51Jl or fixed by the manufacturer, 6~ To appose the removal of tobacco products from the retail price which has become an objective for the anti·tobacrs lobby in order to enable Governments to increase taxes and therefore prices without considering the inflatipnary impact of their actions, i, To define de rcllonsiSility for excise ui~ia your e~any b,th W from the gubtie a:taks and commercial p·ievpain~s. O al To maintain a dialogue with key Government officials and Ministers Ln i:, order to influence their policyl and to establish li:Jrs with QI other coaoanies such as alcohol, oil etc who may assist in this ~ process. 0~ 9. To lead, hut acr. viEh the rest of the tobacco indust.?r and to O maximise the benefits from including other interested parties such as farmers, !orscessorJI suppliers and the trade. These strategies are explained in greater detail in ·14e subsequent sections. Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 -3- 3) E~PWNATIDN DP STRATESIES 1, level of Taxation The combined forces of Government revenue needs and the and smoking lobby have resulted in increased real levels of taxation in Pany cauntries, a sieuada which is likely to irlcsnsifl further in the f3rseeable furusc~ ~l~hougfi a reduction in excise levels is net a realistic objective for most companies, the opportunity to lobby far it should always be esnsidered~ particularly it current revenue yields are lallingl 83wenr, a un realistic objective for most companies is to contain the increase in taxation to a level below the rate of inflation, or at worst in line with itl krguments supporting this include; · the infldtiona$ ~n~aet ~~ tax increases ahead of inflation, particu;stry upon lower income groups who frequently account for a dispsspa~tisna~erl large amount of tobacco sales. - the normal economic arguments that tax increases result in falling demand, employment, profitability and investment, bath directly upon the company and indirectly upon suppliersl - increases in taxation and hence retail price can result in the emecanfe or growth pt transit sc border trade business and hence a fall in revenue yield. · high tax increases may result in smokers dropping out of the manufactured cigarette market and switching to ilYO which is often taxed at a lower level or not at all, It is conceivable char overall Government receipts could fall in such circumstances . · increases in taxation may result in a decline in consumption sufficient to bring about a fall in revenue yield to the Government. Because of the inelasticity of demand for cioarettes over the longer term, this result rarely occurs~ Roueve~, it is not uncommon to see a short term decline in revenue yield which can Se pointed out to CJvernmont when apposing increasesl · increases in taxation which reduce consumption may mean the destruction of the vitality of the tobacco industry and thus the erasion of the tax base which Government may wish to C~ protect over the longer resm~ This applies even more in O countries with a significant Lai export trade which depends to C~1 same extent upon the continued existence of the local industry. Ln · increases in taxation are either out of line with international L~ or regional noons or would result in the incidence of taxation ~O becoming out of line vit~4 such nsr~, ~lthoug~ it can sometimes happen, it is mast unlikely that an soeratinq Coqany will be if, a position where it elects ts absorb a part or all of an increase in excise taxation. Clit; PDF -!::!!::!!::!.f3 StlC.i: Dill ,q. 2, FrePuency of Tax Increases The psychology of smoker demand is such that they are more likely to absorb smaller and more fr~utnt price increases than larger and less trepgBnt price increases, During negotiations with Government therefore it is preferable to seek the former excise environment, However, this has also to be interpreted in the context of the general Iewl at inflation in the country plus the slgnifieance pi stick sales and coinage availability which may act as a constraint to tSe implementation of this strategy, In nrkets of ~igh inflation, It is alvlya preferable to take manufacturer price increases ahead ef·faflatien instead of behind it, with the exact, timing sometimes determining the difference between operating profitably or at loss, The timing of mannfaerurer price inenascs hPvevcr'scmrrimel hae to be integrated with excise increases, and it is desirable that this should be to under certain eitcumstaneesr although flexibility not to do so should also exibt~ i, Structure of Taxation The structure of any excise system determines the pricing scenario of the market place and has a significant impact upon the level of proii~i!ftyl loth brketing and ~fnancr should fully understand the ~plications of the current excise ~t~cFxe and establish whether a competitor advantage might accrue from a change to a different s-~s~teturel In many instancesr change may be either inappropriate or impossible while in other instances change may be appropriate and pos sible , The structure is also highly ralemnt to the key issue of product: pwlity with specific excise normally resulting in higher product qwlity than ad valorem because the latter encourages price competition and hence cost and ~ualfty reduction, There is no single excise structure appropriate to BIT on a global basis because the competitor and brand mix situations vary widely, Companies should evaluate their own position in the market place in order to determine the stneture most appropriate for than, although in the knowledge that excise ItrPCtlVII tend to change only rarely, Bowever, a specific excise structure is are likely to result in higher long term profitability than in an ad valoram structure , Tbcre are No types of excise structure in operation a~a~nd the C~J world which are applied by national Governments as a means of O raising revenue upon tobacco products, Although revenue is also Crl derived from tobacco import tariffs dr duties, these are distinct L1 and do not form a part of this papal The two structures are: G\ a) End Product Excise · a tax linked to the end cigarette product 0~ and b~cd norn~ally upon the final retail Fl selling price or a price agreed between the Government and the manufacturer for the purpose of excise cal~ltion, although on occasions it can also be linked to the ex factory selling price of the YmfaCtll~Cr~ Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 ·5- - end product excise structures are either SOECIFICI ]U) VALORI~M or a mixture of the two, · a SPEerrlC exise is a fixed amount per 000 cigarettes whereby the tax per cigarette is the same irrespective of site~ specification and cost of manufacture or retail price, With the incidence of taxation at a high Isnl, the retail price range in the market place will therefore be limited because any reductions of price have to be absorbed by manufacturers while their ability to lower prices is restricted to the Variation an costs of manufacture, in addition to having a fixed specific excise applicable to all cigarettes a 'slab' system can be applied whereby the amount of specific varies according to the retail pdee, with lower priced cigarettes attracting a lower specific than high priced cigarettes, · an ~ VALOREn excise is a proportional tax calculated as a percentage of the retail sailing price or a price agreed between the manufacturer and the Gover~ent, On ocevions, it has also been calculated as a percentage of the ex factory selling pric~~ with an ad wlorsm srrPersrt, the retail price range in the market place will tend to k quite wide because any price increase or reduction by the manufacturer will be multiplied by the ad valors tax resulting in a lower prise by an amount ach greater than the original reduction by the manufacturer, · a ~XEP and product structure is lin~ly a combination of the specific and ad Palorem structures, such a structure applies in the European Ccmmamitp and is increasingly king adopted in other countries in order W to achieve a system which is related to O the needs and purchasing habits of W consumers, the competitor situation and Cn varying price segPenUI whill provtdlnq a O\ sere stable tar yield [ot tba GoverPment~ Co Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 -b- - an additional feature of the end product excise structure in IL European Community for example, is VIZLUFI ADDED TbX which is.a tax applied to all consuner goods inc id ing c ig aret tes 1 This is always expressed in percentage terms and is therefore an ad valores tax in addition to any end product ad valotem tax which is applied to cigarettes. It such an additional tax is applied, it is important to get Covernment to accept that it farms part of the overall incidence of tobacco taxation and that it forms part of the total ad valorem clement of that tax, b) Speci:le by ~Jeight - sooe countries have a structure of cigarette taxation which is based upon a s?eci:ic amount of tax pee ~~ either of tsjacco only or inclusive of the paper and filter. tiith such a structure the anoune of taxation varies according to the cigarette specification with the result that lighter cigarettes have a significantly lower price than heavier e:garettesl The resultant range of retail prices is therefore similar to an ad 7alorcm structure although the tax is a specific one. The principle effect of such a structure is that the marker may ss:~~h down to either shorter cigarettes or cigarettes with lover cire~nl~rences or densities. Examples include Cameroons and Australia where the Federal excise is upon the overall weight of the cigarette ilc!uding:he paper and the fl!terl t should be emphasised that the main excise distinction is between specific and ad valorem systems whereby a specific excise is levied upon e~e cigarette itself u~eteas an ad valbtem aeise is levied upon all the costs and profits included in the final retail price, except where it is levied upon only the ex factory price where some o.e these elements ate excluded e~gl trade matginl The structure of taxation for products other than cigarettes generally fallovs one of the above opeions~ In the main, eigan and cigarettes do not diree:ly compete against each other vith the ~J possible exception of miniature cigars, Similarly, Pipe tobaccos, O Cheving Tobaccos and Snuff Cc not compete directly against W eigarertcs~ However Roll Taur Ovn smoking tobacco is in d~recr Cn competition with manufactured cigateteesl Companies must understand the relative excise incidence of these two product categories and their impact upon relative price levels aod 03 svi[chilg be~veen the rvo categories. blth6ugh circumstances vary, 3 t~e ahT policy is to ninimise the price advantage of RY[I and so aaximise the market oppo~uniries for manufactured cfgaree:esl Further aspects of the structures of excise taxation are developed in Appendix Ooe~ Clit; PDF -!::!!::!!::!.f3 StlC.i: Dill .7- 4) Excise Collection The administration of tobacco excise taxation can frequently be complex but wit~in this complexity, opportunities may exist to derive benefit for the Companyl In all countries, the timing of excise payment is crucial because of its cash flow and profit implications. The minimum sbjeedve should be to ensure revenue neutrality whereby excise is not paid until payment has been received from the distributive tradel However, one rbld always press for a period of cxdse crcdi~ which is positive, which covess one's casts of administering and ·collecting the tax an behalf of the Coves~Paot, which covets any bad debts [if any) and which is consistent with the concept of all indirect taxation vis: that a consumption tax should be paid when the product is consumed, not when it is manufactured or still in the distribution pipelines There have been occasions where Gsven~ents have increased the period of excise credit instead of permitting a price increase (rhe latter being inflationary) as a means of improving protitabilityl with regard to bad debts, ;overnments should be lobbied to carry this risk themselves, thereby limiting the risle of the manufacturers to the net cost of the goods on!yt Experience of excise systems demonstrates clearly that it is preferable to dnidse the involvement of the trade in the system so that the manufacturers essentially retain the optimum influence over t~e final retail selling pticel In Europe in particular, the power and influence of the trade has and still continues to grow with resultant 3ressUFe upon manufacturers to give higher rpacginsr bonuses st s~he; incentive payments to the tnda~ One of the means whereby the influence of the trade has been contained is the existence of an excise collection system whereby only the manufacturers are involved, and where the trade margin is fixed either by law or practice on the basis of the price determined by the manufacturer in agreement with the Government. where tSe excise is linked to the retail price of a brand, (notmslb via an ad valorem elementl it is necessary to have either a fixed retail price for that brand a recommended retail selling price or an agreed price for the purposes of calculatinP the excise~ This is advisable also because it minimises the ability of the trade to reduce the retail Price and so pass an to ~e consumer the multiplied effect at any pries savingl To be able to vary the price qon vhic~ the excise is based and so Pary the excise its~ll, 1, would result in the trade effectively determining the retail price O instead of the manufactures doing sos W In some countries BAT is at competitor disadvantage against local or national comDanies who either under declare dr underpay their excise liabi!ig~ Although banderoles or fiscal stamps are not desirable because of their negative fmpaa upon manuractpting u) efficiencies, they may offer same scope for resolving this problem. Hovevcr, companies should also eaaider the possibility of presenting a case to Eclvctnment, provided that they are sure of the evidence of undespaymantl Clit; PDF -!::!!::!!::!.f3 StlC.i: Dill ,e· 5, Retail Prices Retail prices, excise levels and increases in excise taxation are often closely linked in mMy countries, Government influence varies from completely controlling retail prices re allowing full freedom to manufacturers, Retail prices vary from being fixed by law or practice to being free, with the manufacturers and the trade being able to change prices by whatever amount they wishr whenever they wishl Because eircu~tanees vary wfdely, it is difficult to have a global strategy, Boweverl the interests of the Group are best served by a situation where the company is free to determine the retail price for its brands which should then be fixed, with the trade margin being linked to this either as a fixed amount or a percentage (a fixed amount is praferable~~ Although it is normally difficult to dictate the degree of involvement by Government in the excise:prfcs process, one should seek to elin~inate or minimise the involoemcnt of the trade so that the balance of power stays with the manulacturlrs~ In markets where stick sales pE~dolpinat8~ clearly the trade plays a key role, but companies should examine eveSt opportunity to maximise the prices accruing to the manufacturer when excise increases ate passed on to the consumer, although balancing this with the need to give the trade a satisfactory level of return based upon the actual stick price, It is normally preferable for the ~n~Jstrf to apply for and i~ple~wt price increases collectively and sirmltaneously and to negotiate with Government, when necessary, on an industry basis, Onilatetal acdan, particularly to reduce pricer may be detrimental to the success of any future application to increase prices either at the same time or independently of an excise increase, It may also be detrimental to market share, C, Retail Price Index It is freguently argued by the antilsmoking lobby that the price of tobacco products should be removed from the index of retail prices or the cost of living index, This would then enable Government to iP~oee higher levels of excise for 'health' reasons, without f~sedng negatively upon the level of inflation, The effect of excise increases will be felt in any economyr whether O or not they are included in an index of retail prices, To pretend ~J otherwise is naive while to exclude a bona fida product from such ~n an index would giP~~ rise to doubts about the valibtt~e o~ Go~nmme~lt Q\ statistics generaUyl Such an action would limit the use of the index in economic policy formulation and economic planning generall~ because the use af an incorrect Ilra~iatfe uU1 always O\ have a distorting effect. Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 .g. Companies should oppose any such attempt, and seek to enlist the suppat pf rrade unions who utillsa the index f3r wage negotiations, e~oethec with economists and statisticians sympathetic to d;e Position P~ the IPdw~ry~ AldloO~b tllS is ;he general global stcau~ll there may be circumstances when the level of inflation combined with price controls may necessitate its removal if to do go is the only means of putting the industry an a basis of profitability for example where a Government is refusing a necessary price increase because of its effect an the index of int2adon, However, this should not be undertaken unless the positive results will aceae over the longer term, 7, Government Relations The issue of Government relations is closely linked to dat of Smoking s Health which is more fully covered in de Public Affairs key area paper, whereas this paper covers relations in the context of the technical aspects of excise taxations Government officials responsible for tobacco excise planning and control, from a relatively low to the highest lever, should be identified and sufficient recular contact maintained while ninisteriat (CoveENnenc~ Opjlaririonl contacts should also he maintained to ensure that the Company is well placed to have its views taken into consideration when policy is being deurmtneC1 Such contact should be de responsibility of senior management and de Board to ensure an adequate level and quality of communication, Such relations should establish BAT as the es~any to which Govenment will turn when deg need advice and assistance upon any aspect of excise taxation, which of course requires the existence of the knowledge and experience of excise in the Company, This is becoming more significant as our competitors seek to influence and change Government policy on excise structures from tSat which is appropriate to BAT to that which is mon appropriate to their own brand dx~ Conversely, we should examine the op~Pocwnides to chance excise systems too, it indeed such a c~ange would be benefieial~ in either instance, good and regular Gsve~Rnt relations are essentials ~3 t~k~S sate canteXtr it is a1sa relevent to maintain close contact Wi.,k, manufacturers Of products aLo subject to excise taxation particularly alcohol where there are many excise similaEiti~s. e~ industry Relations In a compttiriln context, tdbaceo excise taxation is a key subject O f3r discussion and agreement in the National Elanufarmrers W Association I Collective action and influence by the industry is likely to be mete effective and productive than by individual G~ companies, although the latter may also be appropriate from time to time, Although de lead company an excise issues tends to select Q itself on the basis of market sharel it can also be on de basis of ~D knovledga, experience, opntae:s vLh CJvtmwn~~ plere ~kt: share means that it is not BXT companies should seek to ensure a lead position through these other means, Excise conta:ns many complex aspects which have to be mastered if NE(A leadership is to be esrablishedl Clit; PDF -!::!!::!!::!.f3 StlC.i: Dill ·10· Although the main thcust on excise should and will always come from the manfuaetu~en, some benefit may be derived from incorporating natural allies such as tobacco farmersl processors, suppliers to t~L~e fndus;:y, distributors and retailers in the lobbying activities of the NIYI on excise levels, Every opportunity for the industry to agree policy and act collectively should be taken, However, if agreement proves i~ossible, it will be necessary to devote the appropriate Company resources to Government relations to ensure that the Group position and influence exceeds that of the competition, ;1~M, Bingbam April 1991 Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 1DPsn~x I STRUQURT OF TAXATION The two main structures are explored in some detail in this appendix via: A) End product Excise 8) Specific by weight A) End Product Excise This method of taxing cigarettes has been in existence for a long time, There are many ex4mp!es where the three sub systems apply vizr SPECIFIC .a fixed tax per 000 cigarettes e1g, long Kong kD V~j~fE! - a variable tax expressed as a percentage of the retail price e~g~ Venezuera or the ex factory price a~g~ Nigeria MIXED - a combination of the two e~gl the European Community The nrinciple features, advantages and disadvantages of these types o.C en~ brsduet excise are: SPECIFIC .a specific excise structure is most suited to a esqar.y whose brands have high levels of added value or image and are positioned in the high and premium price se~nts~ Because a Specific structure results in only a narrow price range between the cheapest and most extensive, tSEre is little opportunity to compete on d;e basis ef price. R specific sec~erure is ~e global policy of Philip Morris whose brands are normally positioned at the toe end of the markct~ Indeed, ~ep lobby hard to change structures to specific and in some instances have succeeded E~g, Bang Kong. - a specific excise structure is closely associated uid hich levels 31 profitability and product quality~ A!t~Mlch many faerPrs determine profitabilityl a hey one is the nature and extent of price competition, the epI~e~uei:fas fPr vhiet~ are limiod vftl a specific O st.yc~ure~ F0t example: Irl A B C Retail price 100 89 9 Specific Excise 70 70 10 3 Trade Margin · 101 10 9 11 let Manufacturer Price 20 10 30 This example demonstrates two features of a specific stnetu~e based upon base else R: Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 -2· BI · a reduction of 50a in the manufacturer's net price from 20 to 10 results in only an 11s fall in the retail price thereby demonstrating the limited opportunity for price competition, CI - an increase of 50e in the manufacturer's nor price from 20 to 30 results in only an 11e increase in the retail price thereby demonstrating how simple it is let a manufacturer to increase profitability provided freedom to raise prices exists, - for the same reasons as it discourages price competition, a specific structure tends to encourage high quality productsl - a specific structure requires a positive act by Government to raise the level of taxation whie~ may be difficult to achieve in a political coalition situation or where the opposition is streng~ there are excise structures whole features ate essentially specific bur whose iP~act is the same as an ad valorem nuueturcl This occurs when Government has different specific taxes according to a particular price level with 1 lover specific the loves the price and vice versa (a 'slab' specific struMlre)l A specific slab structure is to be preferred to an ad valorem slab structure, - It may be difficult re achieve a wholly specific structure in some developing markets because of the resultant limited price range which Governments may consider necessary to meet the divergent nub of smokers, In such instances, a predominantly specific structure should be the target, AD V9~0I1E~ I the inq~act of an ad valotem excise sttucture will vary according to the local circumstances of a particular company, In a highly competitive ~rket it may result in a significant degree of price competition and a resultant lew level of ptofftabilityl However, in a CIJ Monopaly or near ~cnopoly market, it maJl mot haPr the O same nwl~s unless a nr small eempditos starts a W prl. uu· II rill Ilao d~e~d IPPP Y~Y IIC~a~ .I as the recognition by Competitors and Gaw~cat of the seed far I profitable price sMctPre to eDsare the 3 financial health of the manufacturers and the Ministry O of Finance, O Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 · an ad valorem excise structure creates or is best suited to a company s~ihos6 brands are mainlg located in the lower price segmentsl or a company whole costs of manufacture are significantly lower than the competition by virtue of a dominant market ~hste~ Such a structure enables low added value end low image brands to survive with a significant price advantage over the higher image brands whilst giving no protection at the bottom of the market in terms of a IPi~i~ptfce~ it also enables the advantage of lower costs to be pasted on to the consumer with a effect an the retail gricel · an ad Palorem excise structure is frepuently linked with lower levels of profitability because it creates the circumstances where price competition can flourish( tlewcvet~ there are many exceptions to this which demonstrates that many ether factors need to be taken into account before such a general statement can be made, i an ad ~alose~ structure baa a mltiplfet effect upon ex factory price differences which enables manufacturers to reduce prices at the 'expense' of the Government instead of by reducing their own profit margins for examplel ABC Retail Price 100 50 150 lid Valorem Excise (10\ of retail price) 10 35 105 Trade Margin (1016f retail price) 10 5 15 Net Manufacturers Price 20 10 30 This example demonstrates two features of an ad valorem st.ycture based upon a base case A: B. - a reduction in the manufacturer"' net price by 10 units from 20 to 10 results in a decrease in the retail pries of 50 units thereby showing the ~tipller effect of an ad valorem excise structure I CI I similarly an increase in the manufacturer's net price by 1D wits from 20 to 30 results in an increase in the retail price of 50 IP3~t9~ the;sby CrJ Ihovfng the tPllttpUer dftct in the content of an inereasel U1 Tha ~UL~IPL~ER concept occurs directly from an ad valoren structursl in the above case the multiplier \d has a value of 5 which means a net pries change of 10 O resulta in a retail price ehanga of 501 It Is calculated as follows: Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 -I- 100-x where x · the sum of the proportional elements expressed as percentages of the retail price 100 100 100 100 HI- 100·lad valorem 100-(f0+10) 100-80 20 ~ trade maEqins) ·S - for the same reason as it encourages price competition, an ad valoren structure can often lead to lower gwlity products whose lower casts can be passed on to the consumer in the form of lower prices where the reduction is multiplied through the tax structure. - an ad valsrem structure automatically increases the amount of excise when a manufacturer increases its prices. it therefore has an appear to Government who may nor therefore need to take any action to increase their revenuesl On the other hand, because revenue yield depends on retail prices, there is a greater danger of iovesnment interference in retail price determination than there is when the excise is snecificl in some markets ad va:orem excise is expressed as a percentage of the ex facto~ price and not the retail eriee~ in such situations, it may be appropriate to consider transferring some of the elements normally included in de ex factory price to beyond the point where the ad valorem is applied and so saving the multiplier effect impacting upon them, One means of achieving tSis is to transfer some of the marketing expenses I however, one should appreciate that this might be a short lived tactic which may gin rise to problems with Government over the loncer term and may enhance the power of the trade, particular!y if their margin were increased to absorb the transfer of marketing expenses, aixED - a mixed excise structure contains elements of both Jpcelic and ed val~cm~ Its cdact clearly depends upon the relarive slee af e~e so cltmants~ Such a W system applies rhrou~o~~ ~e European eoewuniry ~n although different countries have different 0~ relativities between the two, - a mixed structure can Sc particularly beneficial to a O company whose brand mix includes both higher priced N brands and mid priced brands which Ire normally local or national. the exact balance or. relativity between the two will depend vet~ much upon the cost structure of a market and ·Sle retail price structure required, Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 -5· 8) 8_8eoifio $ L!Ct Thfs method of taxing el~~tattsl originated in the Dnitsd an~~ vhleh dilcontiPPcd i~ ub;n It jolPsd ths tugla ConnunitIr, iiJvlvc:, many ea0tries Itill apply tech I Ica~a, the most notable being Llrt~li~~ rhl prinelpll features of euob a aysteln are: I bscauss oxcfse vafics in line with tbs qwntity of tobaceo plsdl the fCPdlD8 in for P~L~I to ha launched with lower 5psefffcationa and'hsnes lower prieeJl Such an clciss system ~harafs~e can tsad to intrnle pries eqstftion and tbs liCiiieaPr rsQ~sa in levels of protit~hilitr~ For I~ra, in a~s~~ul, the cf~nrtt market has progrstaiYely P~d throPI PlrisPa ahlJII E~OEID9 Vith 20'5 king site fp!! d~nsi;y ~rsduets 1210 mg) to 25'51 30151 35151 10~ ~~d oov 50'a PICklPPI V!:~ dePdl:161 It tbs Istsl Of 2001g and l~sr~ )\s a selult, Ievs!s of profitability in thin market hat tll!aa ~ipiiicaPtll, Il~hoPC an intensely eqerit~~~ market, t11 Ixeise ry5tla bar created 1 lituation in which price cdqcr!:ton tan flourish at tbs sxpsncs of industry profitability. - the rdod of ap?lpilq JPch a s:ae~rl in important 5eeause of tbs qpo~o3itic~ to Igna JpeoifioationJ vitb Government for excise f8QOlll uhf~ may offer scope for paying 1 lover level of IxeiJe ~~P ~I f~ltltiDD. ClibPDF - v~~fastio.soni Appendix II EXCISE ADMIN!STRRTION There are many aspects of excise ad~inistratiJn which have an impact upon the company. Xlthagk not all of them can be addressed in a key area paper, some are ~at~y of inclusion. Timlne of PaSent It is ias~:an~ to establish exactly when excise taxation falls due, and when the clock starts for any excise credit granted by bve:lments , ai:' banderoles or fiscal st~~y~s, the timing of payment is normally based uam c:?e actual purchase of the stamps, the time it cakes to manufacture and deliver and the stock durations of the manufacturers and the trade, ;Ic~aenrs and supposting evidence are essential to persuade Gsve~menrs to accept payment only when the cigarettes have been sold r~ smokers or as a mi3inwa when payment has been received by che manufacturers, iii:.i s:~e~ systems of collecting excise the same principles of the timing of payment apply although the issue of when delivery to the trade cakes plate often becomes more in~oe~ant (is it when goods move from a central to a regional depot or from the latter to the trade)l P~is also has implications for stock valuations, 'w'it.", regard to the date and day of payment, it is helpful to establish whe~ic~ payment has to be with the Government in the form of a cheque, whether it i:as to Se in their account or whether it has to be with dem i:. the morning or at any time on that dare. The time taken to clear a cheque can often be significant in cash flew termst Ref;mC !~ is important to establish a procedure for refunds or non payment eit~e~:s deal with returns from the trade, damaged goods sc bad debts. The exact details will relate to the method of payment but should take into consideration the following: · a:. entitlement to a credit or refund for all goods returned by CIJ de trade, at de rare of excise appropriate to them. it is O perhaps unrealistic to expect any refund r3 be at a level higher Cn ~~n t'e excise actually paid although it might be C1 af3inistratively simpler to provide for refunds to be at the cJrren-. excise rate. \O · an entitlement to a credit for all goods damaPed during the P nad~c3lrlng process, up to tL point st vh~eh they art distributed to the trade. Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 ·21 - an entitlement to a credit rot all bad debts with trade non payment being shared on the basis that the manufacturer bears the cost of the goods but the Government bears the excise taxation elementl The transfer of ownership is often a crucial element in this areal provisions for excise ta~atfoa and tefunds are not Ilt~ys identical to those for value added tax (if applfeable)l Governments should be persuaded to apply the same provisions using the mote beneficial of the twot Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 Aaoendix fli '' RE~J~F~ :jSOS at TmIf of ~arcz tNCSEISES he link beaten excise taxation and retail prices is obvious but ten an tvo aspects which relate to the timing of any increase which are critical: · manufacturers naut lobby lot the freedomto implcnent price Increases at the same time SE separately from exdse increases. flexibility is the key here because one may wish to implement a manufacturer price increase at the same time on one occasion or separately on anerhar~ · the maMgemant of the implementation of a price increase is critical to ensure that there is no negative discrepancy beaten tax ~e and prices charged and to optimise any opportunity for a 'tax holiday' bath from a manufacturer and a consumerpoint of vi!v, st VRLLIE XCDED TIX OXT is an Id valsrem indirect tar which applies in a growing number of countries, and which is applied to tobacco products over and above excise taxatisn~ In such sounrriol, it is preferable to integrate the VXT into the overall tobacco excise taxation structure and cplltddn procedures, in Order to maintain manufacturer control over retail pr!casl to minhe the overall ad raror~n~ tax ptoportfon, ad to benefit from the often longer credit periods granted for excise taxation compared with those for VXI ror example, in a country such as the larh~Eland~, the end product excise structure is an e~oal balance betueen specific and ad vslsrem while vx is applied additionally at 15,6t of the nuilptia~ ~ft~ such a situation, this means that the ad nlotaP taxation elements add up to over 60~ 61 the overall burden of taxetionl Howevas~ the Cs~a~i~mt and the tobacco industry have agreed to integrate the VXT into the ad valorem excise element such that the balance is 5~:j0~ ~ his is advancageous not only because it rednces the ad Mlsren proportion but also because the three months excise credit is greater than the one month credit period for W~ el LYWRT TXRfrPS Although import tariffs or duties are separate from excise taxation, they have a relationship in that an excise tax can result in a nnlltfpl!#ttoo of an import tariff or because eo~r~nts sometimes coddat them in the same revenue ednraxt~ In the expanding global scenario whereby exports currently account for 18\ o~ snTCo. eigar,ra aalee, urilit are an Leporrant eOllMTeial W I~sul. Since eode o~ our erpen are of higher ~lin, hiphdr pdel O lnrlrnasional brands, our policy ~n erporr ~rh~J is as ~ollovl: Irl - eliminate tariffs · replace ad alonl tariffs with specific tariffs - pereuade C31rernmcnr to raile rcPmul thsmqh elcia and o~5er 0 indirect taxation not tariffs · lobby for Ipeclile or praEohanrly ~ptcfle ucLl aexation because ad valorem excise multiplies the amount of the tariff (a tax on 1 tax)~ Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 ~~____~_ O O ClibPDF - v~~fastio.soni O Iri cn o Co Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 KLYPREAPPSIR I EXCISE TAXATION OF TOBACCO PRODUCTS MARKETING DEPARTI~ENT P~M,BINGHAM APRIL 1991