15:19 09.10.2019

Largest tobacco market players mulling closure of factories over regulation of markup

4 min read

Philip Morris Ukraine, British American Tobacco, JTI and Imperial Tobacco in Ukraine are mulling the possibility of decreasing production and later closing the tobacco factories on the territory of Ukraine over the adoption of the legislative requirement on the government regulation of markup on their goods by the Verkhovna Rada.

"The fact of adoption of this bill will have serious consequences for the industry. This is the absence of a transition period and implementation mechanisms. In the near future, this will expose our business to risks. We will be forced to consider the issue of producing our goods at other factories, since we do not even fully understand how to execute this bill," Director of British American Tobacco Ukraine Simon Welford said at a press conference at Interfax-Ukraine on Wednesday.

He said that bill No. 1049, passed at second reading, introducing a single account for paying taxes and duties, the single social security contribution, sets a fixed markup for wholesale and retail traders of tobacco products at 7% and 13% of the maximum retail price per package.

General Manager of Imperial Tobacco in Ukraine Rastislav Cernak said that these legislative initiatives could entail an increase in the volume of illegal trade in tobacco products from 8.4% to 20%. At the same time, he said that over the past three years, the volume of the "shadow" tobacco market has grown by about seven times and this annually cost UAH 5 billion the national budget.

At the same time, Cernak predicted a 25% reduction in cigarette production. "Such a 25% drop, according to our estimates, will cost the national budget about UAH 7 billion. Therefore, we urge the Verkhovna Rada to revise bill No. 1049 and remove the amendment that establishes the regulation of the markup. We request that transparent lawmaking in Ukraine along with an open dialogue with major investors start working, as such significant changes in taxation force us to rethink our business in Ukraine," he said.

Philip Morris Ukraine Managing Director Michalis Alexandrakis said that the proposed markup is not typical for countries with market economies, itis inconsistent with Ukraine's obligations under the WTO, and contradicts current Ukrainian legislation.

In addition, according to Alexandrakis, the issue of regulating innovative products in the tobacco industry (the requirement is contained in bills No. 1210 and No. 1210-1) should be separated as a separate initiative, which will be discussed taking into account the views of the public and experts.

At the same time, General Manager of JTI Ukraine Paul Holloway proposes to provide a 10% annual increase in excise tax rates on tobacco products to replace the current 20% increase. In his opinion, such an initiative will reduce the rate of decline of the legal market and, according to industry forecasts, will provide additional budget revenues in the amount of UAH 3 billion annually.

Philip Morris, JT International, British American Tobacco and Imperial Tobacco together produce more than 90% of cigarettes in Ukraine.

As reported, the Council of Entrepreneurs under the Cabinet of Ministers asked President Volodymyr Zelensky to veto the bill on the introduction of a single account for paying taxes and fees, the single social security contribution (No. 1049), since it deprives enterprises of the right to set prices for tobacco products.

Earlier, the largest players in the Ukrainian tobacco market said that the adoption of bill No. 1210 on amendments to the Tax Code of Ukraine dated August 30 provides for an increase in the excise duty rate on cigarettes by 2.5 times from January 1, 2020, which will lead to the increase in the prices by 2.5-3 times, to UAH 80-100 per package of cigarettes. The bill also quadruples the tax rate on tobacco-containing products for heating, while changing the approach to taxation of this category of tobacco products.