Taxes and tobacco consumption: GCC policy harmonization vital

Updated 23 October 2015

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.

Philips to close its UK factory in 2020, with loss of 400 jobs

Updated 53 min 49 sec ago

Philips to close its UK factory in 2020, with loss of 400 jobs

AMSTERDAM/LONDON: Dutch health technology company Philips said on Thursday it planned to close its only factory in Britain in 2020, with the loss of around 400 jobs, the latest firm to move manufacturing jobs out of Britain.
The move is part of a push by Philips to reduce its large manufacturing sites worldwide to 30 from 50, and a spokesman said the decision had no direct link with Britain’s decision to leave the European Union.
However, the company said in a statement that it had to “pro-actively mitigate the potential impact of various ongoing geopolitical challenges, including uncertainties and possible obstructions that may affect its manufacturing operations.”
The factory in Glemsford, Suffolk, produces babycare products, mainly for export to other European countries. Almost all its activities will move to Philips’ plant in Drachten, the Netherlands, which already employs around 2,000 workers.
“We have announced the proposal after careful consideration, and over the next period, we will work closely with the impacted colleagues on next steps,” said Neil Mesher, CEO of Philips UK & Ireland.
“The UK is an important market for us, and we will continue to invest in our commercial organization and innovation programs in the country.”
Once a sprawling conglomerate, Philips has transformed itself into a health technology specialist in recent years, shedding its consumer electronics and lighting divisions.
The firm has previously warned that Brexit would put Britain’s status as a manufacturing hub at risk.
Chief Executive Frans van Houten last year said that without a customs union — which has been ruled out by Prime Minister Theresa May — Philips would have to rethink its manufacturing footprint.
Britain is set to leave the EU on March 29, and politicians are at an impasse over how to do so after lawmakers overwhelmingly rejected May’s proposed withdrawal agreement on Tuesday.
Other firms have moved jobs out of Britain in recent weeks, sparking alarm among lawmakers that Brexit is impacting corporate decision-making.
Jaguar Land Rover has slashed UK jobs — mainly due to lower Chinese demand and a slump in European diesel sales — while Ford has said it will slash thousands of jobs as part of its turnaround plan.
While both decisions were driven by factors other than Brexit, each firm has also been vocal in warning of the risks of no-deal Brexit, where Britain leaves abruptly in March without a transition period.