“The price of traditional cigarettes is expected to rise not only because of the increase in excise taxes, but also because of the increase in production costs (increase in electricity costs, the level of the minimum wage and other macroeconomic factors),” according to the Press Service of British American Tobacco Ukraine (BVT ) noted.
Cigarettes will also go up in price. The tax rate for them from January 1, 2021 is the same as the tax rate for cigarettes. Cigarillos are part of a separate product subgroup that is earmarked for a tax rate of UAH 1,456.33 (US $ 52) per 1,000 pieces. In addition, there are plans to increase the minimum excise duty on cigarillos by 20% annually by 2025 and introduce an ad valorem tax rate of 12%, according to Philip Morris’s press service.
Due to tax changes on cigarillos, the price of tobacco products at the Lviv factory (sold under the Marvel brand) is expected to rise. Until recently, tobacco product manufacturers have made clever use of the loophole – Ukrainian legislation does not regulate the definition of cigarillos and how they should differ from cigarettes. At the same time, they were taxed less than cigarettes. For example, cigarettes with a flavored filter wrapped in brown paper rather than white paper could be dispensed as cigarillos and sold for less than the price of cigarettes. The equalization of the excise tax rates eliminated this possibility.
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Why Logic Compact and JUUL are leaving the market
In early December, tobacco company JTI Ukraine announced that it would stop selling Logic Compact electronic cigarettes in Ukraine. “JTI Ukraine has decided to stop selling Logic Compact products in the consumer market of Ukraine because the forecast for the growth of the total volume of the electronic vaporizer category in Ukraine has not been fulfilled. The trend in Ukraine reflects the global trend towards a decrease in retail sales of electronic vaporizers in the world, ”said Gintautas Dirgela, Director of Corporate Relations at JTI Ukraine.
In their view, the decision coincided with changes to the current legislation of Ukraine, according to which all liquids for electronic cigarettes produced before January 1, 2021 will be unlabelled and banned for sale. Since the law does not provide for any transition periods and all liquids already on the market have been banned. As of January 1, 2021, Logic Compact replaceable cartridges will no longer be available for sale. The changes, which came into force on January 1, 2021, are contained in Article 226 paragraphs 226.9, 226.11 and other provisions of the Tax Code in accordance with Law of Ukraine N 466-IX of January 16, 2020. “We believe that this decision violates the principles of quality regulation”, Gintautas Dirgela clarified.
“JTI remains committed to providing an alternative to smoking. We are monitoring market developments and consumer demand in Ukraine to offer an alternative that best meets this demand at the right time,” she said.
Another manufacturer of cigarettes with vaporizers of nicotine-containing liquids, JUUL, has not yet announced its official withdrawal from Ukraine, but rumor has it that it will soon. Unofficially, market participants said the company had significantly reduced the workforce in its Ukrainian office.
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Logic Compact and JUUL were sealed capsules containing nicotine-containing liquids made according to the standards of these manufacturers. Ukraine is literally flooded with Chinese vaporizers and semi-legally produced liquids in the country, the quality of which – the content of nicotine, glycerin, impurities – is not controlled by anyone. On Google, you can easily find dozens of offers to buy smoking devices and liquids, some with a taste of marijuana.
In theory, such liquids should also increase in price from January 1, 2021: an excise tax of UAH 3000 (USD 107) per 1 liter of liquid will be introduced on them. Compulsory excise stamping and an obligation for sellers to purchase licenses to manufacture and sell electronic cigarettes (USD 28 per year) will be introduced for them. Whether tax and law enforcement agencies will be able to monitor compliance with these standards is a big question. Until recently, they couldn’t solve the problem of selling illegal alcohol and fakes of well-known alcoholic brands online. This is one of the factors due to which about 50% of the alcohol market in Ukraine is overshadowed.
Sticks for IQOS and GLO to increase the price
According to the norms of Law No. 466-IX that came into force, this year the most radical changes have been made to the excise duties on heated tobacco – they immediately increased by 320%. Accordingly, the prices for sticks for IQOS – HEETS should rise to a higher price than for cigarettes, which will also increase in price due to a 20% increase in excise duty. Prior to this, PM had warned that with such a radical increase in excise tax, the price of sticks should rise from $ 1.9 to $ 2.8.
The company sent a letter to President Zelensky in connection with a 320% increase in the consumption tax on heated tobacco. She warned that such a move “will reduce the company’s investments in its own production and will stop investments in Ukraine”.
PM responded that the company “will pay some of the excise tax so that those who choose harm reduction products don’t go back to cigarettes.” At what price HEETS will be sold this year, the Prime Minister did not specify and expressed the hope that “the state will also revise the approach to taxing tobacco for heating, as is the case in the EU”. The company is unlikely to agree to a sharp increase in retail prices for HEETS as it is fraught with smuggling from Moldova, Russia and Belarus.
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PM said that they previously “considered the possibility of investing in lines for the production of tobacco for heating at the Kharkiv factory, but the state’s actions do not motivate us to continue investing in Ukraine.”
With the increase in the excise duty on heated tobacco, PM’s main competitor in the alternative segment in Ukraine, BVT, should also raise prices. Until recently, the price of sticks for GLO was comparable to the price for HEETS – $ 1.9 per pack.
“The price of sticks depends on market conditions. We are currently developing a pricing policy for these products that takes tax changes in the market and consumer behavior into account,” replied the BAT press service. The company also clarified that it has no plans to withdraw GLO from the Ukrainian market (amid news of Logic and JUUL leaving).
Along with the excise duty changes in 2021, the sale of electronic cigarettes to minors is banned by law and administrative liability has been introduced for violations of this ban. Implementing this standard will be as difficult as controlling the sale of Chinese vaporizers (vapes) and illegally made liquids, especially online.
This year, the list of places where the use of electronic cigarettes is prohibited, such as places where competitions are held involving minors, has been expanded.
The tobacco market is dwindling
The result of a sharp increase in the tax burden on the tobacco industry will be an increase in shadow and illegal sales and, as a result, a decrease in consumption tax revenue for the household, the interlocutors said.
“Given the rapid rise in excise duty rates for all types of products, there is a very high risk of further growth in illicit trade, both counterfeit and contraband from different countries around the world. Unfortunately, we are seeing a significant increase in the proportion in Ukraine illegal products on the market “, informs the BAT press service.
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“In a rapidly changing business and regulatory environment, it is difficult to predict how the market will perform. In recent years we have seen the illegal cigarette market grow and we are very concerned about it,” said JTI.
The complexity of the situation lies in the fact that law enforcement agencies are reluctant to struggle with tobacco smuggling in the country.
“I think many of you have seen the layouts with cigarettes near stops, underground passages openly selling counterfeit or contraband. Despite our numerous appeals to the police, we literally find that the population is aware of these phenomena did not react at all side of the law enforcement authorities, “said the press service of BAT.
One of the tobacco companies anonymously told us a case about how tobacco workers tried to take public control over the area of illegal cigarette destruction. A huge car with thousands of smuggled blocks was dumped. The customs officers set up a small stove to burn them. Within a few days, tobacco company representatives realized that they had to quit their jobs and just go to the stove – it would take about a month to dispose of such a quantity of cigarettes. And that’s just a truck! It is easy to guess where the surviving cigarettes went, after the representatives of the tobacco companies realized the futility of their efforts – new packs arrived at the grandmother’s stalls at the intersections.