TECHNICAL NOTE III
Tobacco taxes in WHO Member States
This report includes appendices containing information on the share of total and excise taxes in the price of the most widely sold brand of cigarettes, based on tax policy information collected from each country. As described below, the figures were calculated by WHO based on submitted data.
Because of these calculations, the figures published in this report may differ from those submitted by country data collectors.
This note contains information on the methodology used by WHO to calculate the share of total and tobacco excise taxes in the price of a cigarette pack for this report using country-reported data.
Data collection
As discussed in Technical Note I, the data collection questionnaire for this report included a detailed section on the taxation of tobacco products in each country, as well as any supporting documents such as laws, decrees, or other official materials.
Not all taxes increase the price of tobacco.
For example, taxes on the profits of tobacco manufacturers have no impact on price.
Other features of tax systems, such as tax credits and amortization policies, generally have no impact either and are very difficult to analyse. For this reason, the data requested in the questionnaire focus on the types of taxes that usually have a direct impact on price.
Indirect taxes include various types of excise taxes, import duties and value added-taxes.
The most important of these taxes, however, are excise taxes, because they are applied specifically to tobacco and are responsible for substantially increasing the price of tobacco products. Thus, the rates, amounts, functioning and application of excise taxes are central components of the data being collected and are an important tool in reducing tobacco consumption.
The table below describes the types of tax information collected:
1. Amount-specific excise taxes An amount-specific excise tax is a tax on a selected good produced for sale within a country, or imported and sold in that country. In general, the tax is collected from the manufacturer/ wholesaler or at the point of entry into the country by the importer, in addition to import duties. These taxes come in the form of an amount per pack, per 1000 sticks, or per kilogram. Example: US$ 1.50 per pack of 20 cigarettes.
2. Ad valorem excise taxes An ad valorem excise tax is a tax on a selected good produced for sale within a country, or imported and sold in that country. In general, the tax is collected from the manufacturer/ wholesaler or at the point of entry into the country by the importer, in addition to import duties. These taxes come in the form of a percentage of the value of a transaction between two independent entities at some point of the production/ distribution chain; ad valorem taxes are generally applied to the value of the transactions between the manufacturer and the retailer/wholesaler. Example: 27% of the retail price.
3. Tobacco-specific import duties An import duty is a tax on a selected good imported into a country to be consumed in that country (i.e. the goods are not in transit to another country). In general, the import duties are collected from the importer at the point of entry into the country. These taxes can be either amount-specific or ad valorem. Amount-specific import duties are applied in the same fashion as amount-specific excise taxes. Ad valorem import duties are generally applied to the CIF (cost, insurance, freight) value (i.e. the value of the unloaded consignment that includes the cost of the product itself, insurance and transport and unloading). Example: 50% import duty levied on CIF.
4. Value added taxes The value added tax (VAT) is a “multi-stage” tax on all consumer goods and services applied proportionally to the price the consumer pays for a product. Although manufacturers and wholesalers also participate in the administration and payment of the tax all along the manufacturing/distribution chain, they are all reimbursed through a tax credit system, so that the only person who pays in the end is the final consumer. Most countries that impose a VAT do so on a base that includes any excise tax and customs duty. Example: VAT representing 10% of the retail price.
5. Other taxes Any other tax that is not called an excise tax or VAT but applies to either the quantity of tobacco or to the value of a transaction of tobacco product was reported in the questionnaire, with as much detail as possible regarding what is taxed (base), who pays the tax and how the base is taxed.
The data reported in the questionnaires were provided through contacts with the ministries of finance. Where possible, the information was again checked against supporting documents. The nature of the supporting documents for tobacco taxation was in most cases laws or decrees, but other sources were used depending on the legal structure of the country. Secondary sources were also used if any doubts remained, and most of the information was actually downloaded from ministry of finance web sites. In the case of imported cigarettes, import data was used from the United Nations Comtrade database web site (http://comtrade.un.org/db/).
Data analysis
Only the price of the most widely sold brand of cigarettes was considered. In the case of countries where different levels of taxes are applied to cigarettes based on either length of cigarette, quantity produced or type (e.g. filter vs. non-filter), only the rate that applied to the most widely sold brand was used in the calculation. The only exceptions were made in Canada and the United States where, in addition to federal taxes, state/ provincial taxes are applied. Therefore, an average price and average state/provincial tax were calculated in order to estimate the total tax rate of a pack of cigarettes.
The import duty was only applied to most popular brand of cigarettes that were imported into the country. Countries which reported that the most popular brand was produced locally were not imposed an import duty.
Excise taxes and VAT were applied wherever existent and applicable in the country.
“Other taxes” are all other taxes excluding excise and VAT, such as “sales taxes”.
These types of taxes were considered excises if they had a special rate applied on tobacco products. Sales taxes that applied to all products in the same manner were considered VAT. For example, in the case of Egypt, the general sales tax imposed on consumed products is applied at a much higher rate for tobacco products compared with other products. It therefore acts like an excise tax and in this report is considered as such.
The next step of the exercise was to convert all tax rates into the same base, in our case, the tax inclusive retail sales price (hereafter referred to as P). Consider the example in the table above where
Country B applies the same ad valorem tax as Country A, but ends up with higher taxation because the tax is applied later in the distribution chain.
Comparing ad valorem tax rates without taking into account the stage at which the tax is applied could therefore lead to biased results. This is why WHO used the information provided on tax policy in order to calculate the share of tobacco taxes on the most widely sold brand of cigarettes in the country. This indicator takes into account the exact contribution of all taxes in the price of a cigarette pack and therefore represents the best measure of the magnitude of tobacco taxes.
Calculation
Sts is the share of taxes on the price of a widely consumed brand of cigarettes (20-cigarette pack or equivalent).
Sts = Sas + Sav + Sid + SVAT 1
Where:
Sts = Total share of taxes on the price of a pack of cigarettes;
Sas = Share of amount-specific excise taxes (or equivalent) on the price of a pack of cigarettes;
Sav = Share of ad valorem excise taxes (or equivalent) on the price of a pack of cigarettes;
Sid = Share of import duties on the price of a pack of cigarettes (if the most popular brand is imported);
SVAT = Share of the value added tax on the price of a pack of cigarettes.
Calculating Sas is fairly straightforward and involves dividing the amount for a 20-cigarette pack by the total price. Unlike Sas, the share of ad valorem taxes, Sav is much more difficult to calculate and involves making some assumptions. On the other hand, Sid is sometimes amountspecific, sometimes value-based. It is therefore calculated the same way as Sas if it is amount-specific and the same way as Sav if it is value-based. SVAT is usually applied at the end of the taxation process, either on the VAT-exclusive or inclusive retail sales price.
表格：TAX INCLUSIVE RETAIL SALES PRICE OF CIGARETTES Country A (US$)
Country B (US$)
[A] Manufacturer’s price (same in both countries) 2.00 2.00
[B] Country A: ad valorem tax on manufacturer’s price (20%)
= 20% x [A] 0.40 -
[C] Countries A and B: specific excise 2.00 2.00
[D] Retailer’s and wholesaler’s profit margin (same in both countries) 0.20 0.20
[E] Country B: ad valorem tax on retailer’s price (20%) = 20% x [A]+[C] +[D] - 0.84
[F] Final price = P = [A]+[B]+[C]+[D]+[E] 4.60 5.04
To calculate price, it was assumed that the price of a pack of cigarettes could be expressed as the following :
P = [(M + M×ID) + (M + M×ID) × Tav% + Tas + π] × (1 + VAT%) 2
Where:
P = Price per pack of 20 cigarettes of the most popular brand consumed locally
M = Manufacturer’s/distributor’s price, or import price if the brand is imported
ID = Total import duties (where applicable) on a pack of 20 cigarettes 1
Tav = Statutory rate of ad valorem tax
Tas = Amount specific excise tax on a pack of 20 cigarettes
π = Retailer’s, wholesaler’s and importer’s profit margins (sometimes expressed as a mark-up)
VAT = Statutory rate of value added tax Changes to this formula were considered based on country-specific conditions such as the base for the ad valorem tax and excise tax, the existence of ad valorem and specific excise taxes, and whether the most popular brand was locally produced or imported.
In most of the cases the base for the ad valorem excise tax was the manufacturer’s/ distributor’s price.
Given knowledge of price (P) and amountspecific excise tax (Tas) the shares Sas (and, where applicable, Sid) are easy to recover. The case of ad valorem taxes (and, where applicable, Sid) is more complicated because one needs to recover and separate the base (M + M×ID) of the tax into its component parts in order to calculate the amount of ad valorem tax. In most of the cases M was not known (unless specifically reported by the country).
Using equation 2, it is possible to calculate M:
P - π -T 1 + VAT% as
M = (1 + Tav%) x (1 + ID) 3
Unfortunately, π is unknown and will systematically vary from country to country.
For domestically produced most popular brands, we considered π to be nil (i.e. 0) in the calculation of M because the retailer’s and wholesaler’s margins are assumed to be negligible. This would result in an overestimation of M and therefore of the base for the ad valorem tax. This will in turn result in an overestimation of the amount of ad valorem tax. Since the goal of this exercise is to measure how high the share of tobacco taxes is in the price of a typical pack of cigarettes, the assumption that the retailer’s/wholesaler’s profit (π) is nil, therefore, does not penalize countries by underestimating their ad valorem taxes. In light of this it was decided that unless and until country-specific information was made available to WHO, the retailer’s/wholesaler’s margin would be assumed to be nil for the domestically produced brands.
However, for those countries where the most popular brand is imported, assuming π to be nil would grossly overestimate the base for the ad valorem tax because the importer’s profit needs to be taken into account. The import duty is applied on CIF values, and the consequent excise taxes are applied on import duty inclusive CIF values. The importer’s profit or own price is added on tax inclusive CIF value.
For domestically produced cigarettes, the producer’s price includes its own profit so it is automatically included in M but this is not the case for imported products where the tax is imposed on the import duty inclusive CIF value excluding the importer’s profit. So calculating M as in equation 3 would mean assuming importer’s profit to be zero. The importer’s profit is assumed to be relatively significant and ignoring it would therefore overestimate M. For this reason, M had to be estimated differently for imported products: M* (or the CIF value) was calculated using secondary sources (data from the United Nations
Comtrade database). M* was normally calculated as the import price of cigarettes in a country (value of imports divided by the quantity of imports for the importing country). However, because of limited data availability and because of inconsistencies in the import data in some cases, the export price was also considered. When both values were available, the higher of the two was selected for the CIF value.
Looking more closely at the data, import and export prices sometimes varied greatly depending on the partner considered. In order to take this variation into account, the average import and export prices were weighted for each country by the quantities of the imports/exports coming from the different available partners.
When the export price was selected, an additional 10 cents was added to the CIF value because the export price does not include cost, insurance and freight price.
The 10 cents value was calculated based on the global difference between import and export prices. The ad valorem and other taxes were then calculated in the same manner as for local cigarettes using M* as the base, where applicable.
In the case of VAT, in most of the cases the base was P excluding the VAT (or, similarly, the manufacturer’s/distributor’s price plus all excise taxes). In other words:
SVAT = VAT% × (P - SVAT), equivalent to SVAT = VAT% ÷ (1+ VAT%)
So in sum the tax rates are calculated this way:
Sts = Sid + Sas + Sav + SVAT
Sas = Tas ÷ P
Sav = (Tav % × M) ÷ P
or
(Tav % × M*× (1+ Sid)) ÷ P
if the most popular brand was
imported
Sid = (TID % × M*) ÷ P
(if the import duty is value-based)
or
ID ÷ P
(if it is specific)
SVAT = VAT% ÷ (1+ VAT%)
1 Import duties may vary depending on the country of origin in cases of preferential trade agreements.
WHO tried to determine the origin of the pack and relevance of using such rates where possible.
Appendix I: Regional summary of MPOWER measures
Appendix I provides an overview of selected tobacco control policies. For each WHO region an overview table is presented that includes information on monitoring and prevalence, smoke-free environments, treatment of tobacco dependence, health warnings and packaging, advertising, promotion and sponsorship bans, and taxation levels, based on the methodology outlined in
Technical Note I.
Country-level data were often but not always provided with supporting documents such as laws, regulations, policy documents, etc. Available documents were reviewed by WHO and questionnaire answers were amended accordingly, especially for Member States that reported meeting the highest standards. This review, however, does not constitute a thorough and complete legal analysis of each country’s legislation. Except for smokefree environments, data were collected at the national/federal level only and, therefore, provide incomplete policy coverage for Member States where subnational governments play an active role in tobacco control.
Age-standardized prevalence estimates for both sexes combined were produced by applying global population weights for males and females to the agestandardized adult male and female daily smoking prevalence rates (as presented in Appendix VII). Global male and female population weights were obtained from the UN population data for 2006.
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