Taxes and tobacco consumption: GCC policy harmonization vital

Updated 23 October 2015
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Taxes and tobacco consumption: GCC policy harmonization vital

Government spending in the Gulf Cooperation Council (GCC) countries has been rising rapidly since the onset of the Arab Spring.
On the revenue side, oil and gas revenues account for more than 85 percent of GCC government revenue.
This high dependence on oil and gas makes the GCC countries highly vulnerable to oil price fluctuations, with the recent decline in oil prices bringing fiscal sustainability concerns to the forefront.
The IMF estimates that the GCC fiscal balance is expected to turn into deficit of $113 billion (8 percent of GDP) in 2015 from a surplus of $76 billion (4.5 percent of GDP) a year ago.
To address their revenue vulnerability and fiscal sustainability the GCC countries should prioritize fiscal reform and put in place policies to diversify the sources of government revenue. 
Revenue diversification policies should be directed not only at mobilizing non-oil revenue in the short run, but also at improving the buoyancy of tax revenue.
Government revenue diversification reforms are recommended with the most efficient plan being to introduce both broad-based sources of taxation (a value added tax) and indirect taxes (excise taxes) on specific goods and products like gasoline, diesel, alcohol and tobacco.
“The Global Tobacco Epidemic 2015” report, states that 6 million people a year die from tobacco-related diseases, with that number estimated to increase to 8 million people by 2030. According to the World Health Organization (WHO) and Tobacco Free Initiative (TFI), a 10 price increase on a pack of cigarettes would be expected to reduce demand for cigarettes by about 4 percent in high-income countries and by about 5 percent in low- and middle-income countries, where lower incomes tend to make people more sensitive to price changes. This price increase is interlinked with price and tax measures, as Article 6 of the WHO Framework Convention on Tobacco Control states: ‘Price and tax measures are an effective and important means of reducing tobacco consumption by various segments of the population, in particular young persons.’
However, despite clear evidence that increasing taxes is an effective intervention to reducing tobacco use whilst increasing government revenues, GCC countries remain constrained by international and bilateral trade agreements from raising the common external tariff on cigarettes and other tobacco products thereby restricting the ability of the GCC to raise prices to reduce tobacco consumption.
Tobacco consumption in Middle East

The Middle East and North Africa region is one of the fastest growing consumers of tobacco products, especially cigarettes.
With a young, fast-growing population, where smoking is culturally acceptable and with low awareness of health implications, tobacco consumption is high.
In 2010, the region accounted for a 7.1 percent market share of global cigarettes volume, the fourth largest globally. Significantly, the smoking of pipe tobacco in the region, popular due to the consumption of shisha, represents roughly 45.5 percent of global demand.
By country, Saudi Arabia has the highest per capita consumption of shisha pipe tobacco in the world while Egypt, which is MENA’s largest cigarettes market, consumes most in volume terms.
Saudi Arabia, with the largest GCC population, is the largest market for the cigarette industry, closely followed by the UAE.

Constraints on GCC tobacco tax policy options

The GCC countries are considering raising custom duty on tobacco, both to raise revenues and for health objectives of reducing consumption and smoking incidence (as per WHO guidelines).
The GCC recently endorsed a call by the WHO to raise taxes on tobacco.
However, they face a number of constraints in achieving their objectives given their international obligations.
International and bilateral trade agreements constrain the GCC countries from raising the common external tariff on cigarettes and other tobacco products thereby restricting the ability of the GCC to raise prices to reduce tobacco consumption and smoking incidence, while increasing government revenue from tobacco taxation.
The GCC nations are members of the WTO and have to comply with their treaty commitments and with a maximum import duty, known as the ‘bound’ rate.
The current 100 percent import duty across the GCC is set at the bound rate for both Bahrain and Kuwait.
Furthermore, free trade agreements signed by Bahrain and Oman separately with the US dictate that the countries remove tariffs on cigarettes (among other products) within a ten-year timeframe (due 2016 and 2019 respectively).
Last, but not the least, the GCC Customs Union agreement includes a Common External Customs Tariff (CET) for goods imported from outside the GCC, as well as common customs regulations and procedures, which further constrains tobacco tax policy options.

Tobacco taxation in GCC

The uniform system of cigarette taxation places the Common External Tariff at 100 percent of the CIF price (ad valorem) and a minimum specific duty equivalent to SR100 per 1,000 cigarettes, whichever is higher.
The minimum specific duty component of taxation is an essential component, given that it enables a secure contribution toward the government revenue base.
The minimum specific duty was first introduced by Saudi Arabia in the 1990s and was fully harmonized among GCC member states when Kuwait adopted the current KD8 per 1000 cigarettes minimum in 2002.
In the years that followed, manufacturers have increased prices of many brands above the levels at which the minimum duty applies, thus increasingly subjecting them to the ad valorem component of the tariff.
However, the minimum specific duty was not systematically adjusted for inflation and its real value and incidence has declined.
Any increase in specific duty would mean that all cigarettes must pay the minimum amount of tax regardless of their CIF price.
By contrast, when the ad valorem duty rises, the price of mid and premium price cigarette brands increase by more than that of low and cheap brands given that the tax charged is a proportion of the CIF price.
This provides an incentive to consumers to substitute, trading down to cheaper and lower quality products, which could reduce government revenues under a purely ad valorem tax regime and undermine governments’ health objectives.

Proposal for a new GCC excise duty regime for tobacco

The GCC countries should agree and introduce excise taxes on tobacco consumption as a policy tool to increase tobacco prices for health reasons and to raise revenue.
Ideally, the introduction of domestic excise taxes on tobacco should be in the form of a specific nominal excise duty to be introduced in each GCC member state consisting of a fixed amount per 1,000 cigarettes or equivalent units of other tobacco products.
The new excise duty would be introduced by the Ministries of Finance, with a revised mandate enabled by the requisite legal and regulatory reforms, which would set up the revenue administration.
It is also feasible that the revenue administration be out-sourced to customs, which then becomes Customs and Excise.
Additionally, there should be GCC policy harmonization ie. introduction of tobacco excise taxes should be applied uniformly (including on domestic production), equally and in synchronized manner in all countries in order to prevent arbitrage opportunities and illicit trade or smuggling.
The process of implementation of the new tax structure should also be gradual to avoid encouraging smuggling and illicit trade.
This will enable the building of tax capacity in the form of tax revenue authorities to implement the fiscal reform, monitor and collect revenue.
The set-up of an excise revenue administration has the added advantage of facilitating the introduction of other excises, notably on gasoline, diesel and other oil products — gradually leading to revenue diversification and eventually fiscal consolidation.

— Dr. Nasser H. Saidi heads Nasser Saidi & Associates, a niche consultant and adviser to governments, central banks, regulators, multi-national and regional companies. He is the former chief economist of the Dubai International Financial Center from 2006 to 2012.


Gulf of Oman tanker attacks jolt oil-import dependent Asia

Updated 15 June 2019
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Gulf of Oman tanker attacks jolt oil-import dependent Asia

  • Iranian threats to close the Strait of Hormuz have alarmed Japan, China and South Korea
  • Japan’s conservative prime minister, Shinzo Abe, was in Tehran when the attack happened

SEOUL: The blasts detonated far from the bustling megacities of Asia, but the attack this week on two tankers in the strategic Strait of Hormuz hits at the heart of the region’s oil import-dependent economies.

While the violence only directly jolted two countries in the region — one of the targeted ships was operated by a Tokyo-based company, a nearby South Korean-operated vessel helped rescue sailors — it will unnerve major economies throughout Asia.

Officials, analysts and media commentators on Friday hammered home the importance of the Strait of Hormuz for Asia, calling it a crucial lifeline, and there was deep interest in more details about the still-sketchy attack and what the US and Iran would do in the aftermath.

In the end, whether Asia shrugs it off, as some analysts predict, or its economies shudder as a result, the attack highlights the widespread worries over an extreme reliance on a single strip of water for the oil that fuels much of the region’s shared progress.

Here is a look at how Asia is handling rising tensions in a faraway but economically crucial area, compiled by AP reporters from around the world:

WHY ASIA WORRIES

The oil, of course.

Japan, South Korea and China don’t have enough of it; the Middle East does, and much of it flows through the narrow Strait of Hormuz, which is the passage between the Arabian Gulf and the Gulf of Oman.

This could make Asia vulnerable to supply disruptions from US-Iran tensions or violence in the strait.

The attack comes months after Iran threatened to shut down the Strait of Hormuz to retaliate against US economic sanctions, which tightened in April when  the Trump administration decided to end sanctions exemptions for the five biggest importers of Iranian oil, which included China and US allies South Korea and Japan.

Japan is the world’s fourth-largest consumer of oil — after the US, China and India — and relies on the Middle East for 80 per cent of its crude oil supply. The 2011 Fukushima nuclear disaster led to a dramatic reduction in Japanese nuclear power generation and increased imports of natural gas, crude oil, fuel oil and coal.

In an effort to comply with Washington, Japan says it no longer imports oil from Iran. Officials also say Japanese oil companies are abiding by the embargo because they don’t want to be sanctioned. But Japan still gets oil from other Middle East nations using the Strait of Hormuz for transport.

South Korea, the world’s fifth largest importer of crude oil, also depends on the Middle East for the vast majority of its supplies.

Last month, South Korea halted its Iranian oil imports as its waivers from US sanctions on Teheran expired, and it has reportedly tried to increase oil imports from other countries.

China, the world’s largest importer of Iranian oil, “understands its growth model is vulnerable to a lack of energy sovereignty,” according to market analyst Kyle Rodda of IG, an online trading provider, and has been working over the last several years to diversify its suppliers. That includes looking to Southeast Asia and, increasingly, some oil-producing nations in Africa.

THE GEOGRAPHY AND THE POLITICS

Asia and the Middle East are linked by a flow of oil, much of it coming by sea and dependent on the Strait of Hormuz.

Iran threatened to close the strait in April. It also appears poised to break a 2015 nuclear deal with world powers, an accord that US President Donald Trump withdrew from last year. Under the deal saw Tehran agree to limit its enrichment of uranium in exchange for the lifting of crippling sanctions.

For both Japan and South Korea, there is extreme political unease to go along with the economic worries stirred by the violence in the strait.

Both nations want to nurture their relationship with Washington, a major trading partner and military protector. But they also need to keep their economies humming, which requires an easing of tension between Washington and Tehran.

Japan’s conservative prime minister, Shinzo Abe, was in Tehran, looking to do just that when the attack happened.

His limitations in settling the simmering animosity, however, were highlighted by both the timing of the attack and a comment by Iranian Supreme Leader Ayatollah Ali Khamenei, who told Abe that he had nothing to say to Trump.

In Japan, the world’s third largest economy, the tanker attack was front-page news.

The Nikkei newspaper, Japan’s major business daily, said that if mines are planted in the Strait of Hormuz, “oil trade will be paralyzed.” The Tokyo Shimbun newspaper called the Strait of Hormuz Japan’s “lifeline.”

Although the Japanese economy and industry minister has said there will be no immediate effect on stable energy supplies, the Tokyo Shimbun noted “a possibility that Japanese people’s lives will be affected.”

South Korea, worried about Middle East instability, has worked to diversify its crude sources since the energy crises of the 1970s and 1980s.

THE FUTURE

Analysts said it’s highly unlikely that Iran would follow through on its threat to close the strait. That’s because a closure could also disrupt Iran’s exports to China, which has been working with Russia to build pipelines and other infrastructure that would transport oil and gas into China.

For Japan, the attack in the Strait of Hormuz does not represent an imminent threat to Tokyo’s oil supply, said Paul Sheldon, chief geopolitical adviser at S&P Global Platts Analytics.

“Our sense is that it’s not a crisis yet,” he said of the tensions.

Seoul, meanwhile, will likely be able to withstand a modest jump in oil prices unless there’s a full-blown military confrontation, Seo Sang-young, an analyst from Seoul-based Kiwoom Securities, said.

“The rise in crude prices could hurt areas like the airlines, chemicals and shipping, but it could also actually benefit some businesses, such as energy companies (including refineries) that produce and export fuel products like gasoline,” said Seo, pointing to the diversity of South Korea’s industrial lineup. South Korea’s shipbuilding industry could also benefit as the rise in oil prices could further boost the growing demand for liquefied natural gas, or LNG, which means more orders for giant tankers that transport such gas.