Big tobacco about to score big win in Ukraine, roll back excise tax
March 15, 2021: It has been 3.5 months since Ukraine’s government tripled the excise tax for heated tobacco products — it is now the same as the minimum tax for traditional cigarettes.
The World Health Organization (WHO) welcomed this move. It was supposed to bring Hr 115.8 billion ($4.1 billion) to Ukraine’s budget by 2025, according to estimates by the Kyiv School of Economics (KSE).
But this welcome change may be rolled back soon because tobacco giant Philip Morris International (PMI), an international company worth $87 billion, does not want to pay.
The company demands that the government overturn the law, which affected HEETS, tobacco sticks used in IQOS, a tobacco heating device sold by PMI.
If it’s not done, PMI, one of Ukraine’s biggest taxpayers, is threatening to decrease its presence on the Ukrainian market. However, it has yet to exit any markets in protest of high taxes.
“When you are faced with such an unprecedented massive one-shot price increase basically you do not have a lot of options,” Philip Morris Ukraine CEO Kostas Salvaras said at a press conference in Kyiv on March 10. “Your options are to increase the price, basically meaning passing this tax to more than 1 million users of these products today in Ukraine or reconsider some of our investments in Ukraine.”
PMI demanded the government to decrease the tax for heated tobacco products by 30%. This would cost Ukraine Hr 47.4 billion ($1.6 billion) in unpaid taxes in the next five years and around Hr 3 billion ($107 million) in 2021.
PMI has launched a campaign to get the tax for heated tobacco products lowered. It teamed up with several business associations and called on the government to lower the tax for heated tobacco. They met with lawmakers and other officials in person and sent letters to President Volodymyr Zelensky and Finance Minister Serhiy Marchenko asking for “a compromise.”
It worked. Leader of the Servant of the People parliamentary faction David Arakhamia personally filed an amendment to decrease the tax for heated tobacco by 30% starting April 1.
The Finance Ministry backed the proposal. On Feb. 25, the amendment was approved by the parliamentary finance committee — the same one that initially supported the tax increase.
Parliament is expected to vote on it during the March 16-19 session.
Because the amendment was authored by the leader of the ruling party, which holds 245 out of 450 seats in parliament, chances are high that it will get approved.
“Since the head of the faction is pushing for this amendment, the lawmakers in the faction understand that they are meant to support it,” said Lilia Olefir, executive director at Life, a public health nonprofit, “I suspect that there is a pressure.”
The proposal is “very concerning,” Jarno Habicht, WHO representative in Ukraine told the Kyiv Post.
“A lower tax on heated tobacco products will result in lower price increases in those products, which will make them more affordable, especially for the youth, and it will significantly reduce incentives for users to quit,” Habicht added.
Arakhamia defended lower taxation of heated tobacco products as economically viable, and denied that he was lobbying for the tobacco industry.
Arguing for the tax decrease, Arakhamia echoed PMI’s position: That the current tax will boost illicit trade.
According to PMI, the tax increase will rocket the price for PMI-made HEETS to Hr 80 per pack ($2.8), which would be much higher than in neighboring Russia, Belarus and Moldova, where the price is Hr 56 ($2), Hr 59 ($2.1) and Hr 61 ($2.2) respectively. The company claimed this would encourage smuggling.
In Ukraine, one HEETS pack currently costs Hr 58 ($2.1). Despite the tax increase effective since Jan. 1, the company hasn’t yet raised the prices.
Olefir called the PMI’s argument “manipulation.”
“Philip Morris would have to reduce its margin a little bit and that is what all the fuss is about,” she said. “It is absolutely clear to people working in tobacco control or economists that Philip Morris will not raise the price to Hr 80, because they need to make HEETS affordable so that they are approximately the same price as their cigarettes. This is their pricing policy in most countries,” she added.
Moreover, higher taxes do not necessarily encourage illicit trade, WHO believes.
“While price and tax increases may encourage illicit trade, other factors such as weak tax administration are a much stronger determinant of increased illicit trade. Illicit trade can and must be prevented. But it will not be effectively prevented by foregoing tax increases,” Habicht said.
“The tobacco industry often exaggerates the effect of illicit trade and the impact of tobacco control on illicit trade in order to intimidate policymakers from taking evidence-based steps to reduce tobacco use,” he added.
Arakhamia used the same argument when promoting his amendment on the 30% tax decrease for heated tobacco in February.
“The producers turned to us and told us about the risks the tax increase caused, that the neighboring countries have lower excise tax, this is a sufficient risk for illicit trade,” he said during the online meeting of the parliamentary committee of finance on Feb. 25.
Arakhamia joined the meeting of parliament’s finance committee, of which he isn’t a member, to defend the amendment.
The majority of the committee members supported his amendment. Among them were Maryan Zablotskyy and Yevhen Petruniak, lawmakers that had been exposed lobbying in favor of tobacco companies, according to Life NGO.
The Finance Ministry also backed the amendment. It has not responded to the Kyiv Post’s request for comment.
Prior to the committee meeting, the Ministry received a letter from PMI in which the company promised to pay Hr 11 billion — the amount the budget expected to receive from taxes on heated tobacco products in 2021-2022 — if the law gets approved.
If it doesn’t, the company said it would only pay half, expecting sales of HEETS to drop.
“This kind of guarantee letter or any other piece of paper has no legal force,” said Olefir.
But Arakhamia persuaded the committee members that it is trustworthy.
After the news broke about the committee’s approval of the tax decrease, Arakhamia was criticized for his role.
In a comment to the Kyiv Post, he denied lobbying for PMI, and repeated that he sought to prevent the tobacco market from going into shadow.
“We sat down with Philip Morris and talked about this problem,” Arakhamia said at the press conference on March 1. “We said: ‘This won’t be good if amid coronavirus (pandemic) the retail price (for HEETS) will rise to Hr 80.’ And they took upon themselves this 200% increase at their own expense, so the retail price remains the same. That is the extent of Arakhamia’s ‘lobbying.’”
Olefir is not so sure.
“These communications between Arakhamia and Philip Morris indicate that he fell under the influence of this corporation and now protects the interests of this corporation and not the interests of Ukrainians,” Olefir said. “From what we know today, the president’s office cannot be unaware of this situation.”
Arakhamia told the Kyiv Post he wasn’t ordered to file the controversial amendment by the president’s office, or any other institution.
This is not the first time that Arakhamia has helped PMI try to reduce contributions to Ukraine’s budget. Back in December 2020, he tried and failed to decrease taxes for heated tobacco products with another bill.
Prior to the December vote, Bukvy media outlet photographed Arakhamia’s phone screen in parliament that showed him texting fellow lawmakers to persuade them to support the bill.
Tax decrease strategy
PMI’s goal is broader than just short-term savings. It wants to roll back the law that treats heated tobacco the same as traditional cigarettes, in order to pay less in the long term.
The company is trying to persuade Ukraine’s government that heated tobacco is healthier than traditional cigarettes and should have looser regulations and lower taxes.
Seeing this coming, the signatory countries of the WHO’s Framework Convention on Tobacco Control (FCTC) agreed to treat heated tobacco as traditional cigarettes in 2018. Ukraine signed and ratified the FCTC treaty in 2006.
The so-called “reduced harm” claims the company is using to reduce taxes in Ukraine are the same ones it uses worldwide, according to an investigation by the Organized Crime and Corruption Reporting Project (OCCRP), a Kyiv Post partner.
According to the publication, these efforts intensified after the United States’ Food and Drug Administration (FDA) allowed PMI to market its heated tobacco device, IQOS, as exposing users to fewer harmful substances than traditional cigarettes in July 2020.
PMI uses the FDA decision as a pretext to push for lower taxes overseas, including in Italy and Colombia.
Most research on heated tobacco is sponsored by PMI, which includes research the company sent to the FDA.
The FDA told OCCRP that it had authorized the use of IQOS in the U.S. because studies found that “the products produce fewer or lower levels of some toxins than combustible cigarettes.”
However, it said that PMI had not proved the device posed a “reduced risk of tobacco-related disease or harm.”