№ 8/2021

Fìnansi Ukr. 2021 (8): 100–112https://doi.org/10.33763/finukr2021.08.100

TAX POLICY

POLIAKOV Mykhailo ¹

¹Philip Morris Ukraine

Tendencies and limitations on increasing excise tax on cigarettes in EU member states

The recent studies of levying excise tax on cigarettes and the policy of the EU and its member states aimed at setting a minimum excise tax thereon have been analyzed in order to substantiate recommendations on the respective reform in Ukraine. The article confirms findings that a sharp increase in the excise tax (high excise rates) lead to the growth of illicit trade in such products. For that reason, when initiating corresponding changes to legislation, it is essential to choose such pace of increase in tax rates that would take into account the purchasing power and the level of such rates in neighboring countries. Even severe tax control measures may turn out to be inefficient if there are any conditions for getting high profits from the illicit market. Achieving excise revenue growth without fiscal losses due to the increase in illicit tobacco trade is possible only through a gradual increase in tax rates. It has been established that the negative experience of a number of the new EU countries in reaching the EU minimum excise tax on cigarettes should be taken into consideration while designing future pan-European legislative changes to avoid decisions that would either set out too high target thresholds or disregard the need to provide a sufficient transition period to achieve them. Today significant differences persist in the levels of purchasing power in the member states and there are still opportunities for smuggling cigarettes into the EU through its eastern borders. Given this, several post-socialist EU countries remain vulnerable to new increases in the minimum excise tax on cigarettes and are unlikely to agree on legislative changes that set forth “jumps” in the excise tax rates or their significant growth in the coming years. It has also been demonstrated that most EU countries have abstained from raising cigarette excise tax significantly during the COVID crisis for fear of the illicit trade growth. It has been proven that Ukraine should review the current plan on increasing cigarette excise tax by slowing down the tax growth and extending the plan till 2028.

Keywords:tobacco products, cigarettes, tobacco market, illicit trade in cigarettes, excise tax, tax burden

JEL: Н21, Н25, H26

Poliakov M. . Tendencies and limitations on increasing excise tax on cigarettes in EU member states / M. Poliakov // Фінанси України. - 2021. - № 8. - C. 100-112.

Article original in Ukrainian (pp. 100 - 112)

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