Tobacco Taxation – the case of
Bulgaria
Adriana Mladenova
Research Economist
Institute for Market Economics, Bulgaria
www.ime.bg
Prague, 20 September 2006
EU-15 “Old Members”
 All old EU member states meet the minimum requirement of
64 EUR tax per 1000 cigarettes.
 Relative total tax burdens, on average, 75% of retail price,
do not vary greatly between most old member states.
 There are substantial differences in the absolute amounts of
total tax burdens and retail prices of MPPC cigarettes.
Example:
UK: Price per pack – 7,69 EUR; tax – 3,05 EUR
Spain: Price per pack – 2,25 EUR; tax – 1,76 EUR
Prague, 20 September 2006
New member states EU-10
 Only Cyprus and Malta comply with EU cigarette tax
regime at present.
 New member states have to increase current excise duty
levels on cigarettes by between 18% (Slovenia) and 310%
(Latvia).
 Most countries have negotiated transition periods, but they
are relatively short.
Dec. 2007 – Czech Republic and Slovenia (the same as
Greece and Spain)
Dec. 2008 – Hungary, Poland and Slovakia
Dec. 2009 – Estonia, Latvia and Lithuania
Prague, 20 September 2006
New Accession Country –
Bulgaria
 Bulgaria has already began increasing gradually its excise duty on
cigarettes since 2002.
 In 2006 it increased the excise taxes from 6.1 Euro for 1000
cigarettes + 31.8% on sale price to 7.7 Euro for 1000 c. + 48% on
sale price.
 As a result, the hike in retail prices of cigarettes in 2006 was 62%.
 The last tobacco price adjustment is scheduled for 2010 – taxes
(specific + ad valorem) will increase by 49.6%.
Contribution of increase of excise duties on tobacco to inflation in Bulgaria
(Ministry of Finance estimations)
year 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
44,22
23,84 6,74 73,92
60,00
Prague, 20 September 2006
Tobacco Taxation in Bulgaria and EU
Excise tax incidence (as % of price)
situation as at 1 July 2006
77.01%
Bulgaria
73.88%
Romania
70.03%
EU-10
75.20%
EU-15
66%
68%
70%
72%
Prague, 20 September 2006
74%
76%
78%
Components of tax incidence
(as % of retail price)
100%
15.52%
16.49%
14.07%
16.67%
80%
60%
36.52%
38.63%
33.36%
48.00%
40%
20%
21.09%
20.09%
22.61%
0%
EU-25
EU-15
Specific Excise
EU-10
Ad Valorem Excise
Prague, 20 September 2006
Bulgaria
VAT
12.34%
Cigarette retail price breakdown
(EUR per pack of 20 cigarettes)
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
Romania
Bulgaria
Latvia
Prague, 20 September 2006
Lithuania
Overall tax burden
Estonia
Czech Republic
Poland
Slovak Rep
Hungary
Slovenia
Cyprus
Pre-tax price
Malta
EU-10
Spain
Luxembourg
Danemark
Germany
France
Ireland
UK
EU-15
0.00
Aims of the EU policy in the sphere of
tobacco taxation (1)
 To achieve tax harmonization and uniformity –
the EU requirement has not achieved harmonization
of tax burdens so far, neither any significant
convergence of retail selling prices in EU.
 To discourage consumption of tobacco products
– there is considerable substitution away from hightaxed cigarettes towards low-taxed tobacco or nonduty paid cigarettes. Also, high taxes lessen
disposable income of people and discourage
consumption of other goods and services.
Prague, 20 September 2006
Aims of the EU policy in the sphere of
tobacco taxation (2)
 To raise revenues for the government – higher
taxes lead to increase in smuggling and shadow
economy, which reduce the government excise and
VAT revenues
 To correct for negative externalities from
smoking. Smokers impose costs on society such as
higher expenses of treating smoking-related illness,
lost of well-being and market earnings as a result of
illness or death – but smokers tend to live shorter
lives than non-smokers which saves on pension
system and healthcare costs of age-related diseases.
Prague, 20 September 2006
Demographics of tobacco in
Bulgaria
Trend in adult smoking prevalence in Bulgaria
(ages 18-69)
100%
80%
59,5%
58,8%
56,1%
50,0%
60%
40%
20%
0%
2002
2003
2004
Prague, 20 September 2006
2005
Cigarette consumption - Bulgaria v.s.
EU averages
4 000
35%
3 500
30%
3 000
25%
2 500
20%
2 000
15%
1 500
10%
1 000
500
5%
-
0%
Bulgaria
Romania
EU-25
EU-15
Annual cigarette consumption per person
Percentage of population smoking
Prague, 20 September 2006
EU-10
The business of tobacco in Bulgaria
and some countries in EU
80 000
0.8%
0.70%
0.74%
70 000
0.7%
60 000
0.6%
50 000
0.5%
40 000
0.4%
30 000
0.3%
0.24%
20 000
0.2%
0.04%
10 000
0.06%
0.09%
0.03%
0.05%
0.06%
0.05%
0.03%
0.07% 0.1%
0.00%
-
0.0%
Cyprus
Austria
Belgium
Slovak Rep
Portugal
Hungary
Romania
France
Poland
Spain
Italy
Bulgaria
Greece
Land devoted to growing tobacco (ha)
as % of total agricultural land
Prague, 20 September 2006
Policy of cigarette production in
Bulgaria
 Production of cigarettes in Bulgaria is under the monopoly of the stateowned Bulgartabac Holding – it has a market share of more than 90%
of the cigarettes on the market.
 The domestically produced cigarettes are protected by high import
duties.
 Cigarette pricing is regulated by imposition of a minimum retail price.
 Tobacco producers are heavily subsidized in comparison with other
entrepreneurs – as a result tobacco production is not efficient and a lot of
farmers will not receive direct payments under CAP as they fail to meet
the requirement of minimum 1 hectare per farm.
 Tobacco production is a subject to political games –the tobacco farmers
are mainly concentrated in regions with high prevalence of Turkish
ethnical population.
 Control on customs is weak and corruption practices are common.
Prague, 20 September 2006
The future of the tobacco business in
Bulgaria
 Bulgartabac Holding has began restructuring its subsidiaries and
will privatize several of its plants in the coming months.
 Fixed prices on cigarettes will be abolished in October 2006 and
the market will be liberalized.
 Import duties on cigarettes imported from EU will be abolished
due to EU accession of the country.
 New market players have recently entered the market such as
Philip Morris – distributor of Marlboro, British American
Tobacco – distributor of Kent. Competition on the market will
intensify.
Prague, 20 September 2006
Impact of Applying EU Cigarette Tax
Regime in Bulgaria
1. Affordability of cigarettes decreases substantially
in Bulgaria.
The retail cigarette prices in Bulgaria are lower than in most of the EU
members, but in real terms (cigarette prices relative to personal
disposable income) they are much higher compared to EU benchmark.
The increase of cigarette prices will be considerably greater than the
expected growth in disposable income per capita in Bulgaria. Given
the great percentage of smokers in the country, the high tax rates will
have a negative impact on overall consumption and savings of people,
which means less economic growth for the economy.
Prague, 20 September 2006
Impact of Applying EU Cigarette Tax
Regime in Bulgaria
2. Increased smuggling, cross-border
shopping and bootlegging.


Due to the hike in excise duties at the beginning of the year,
Bulgaria now experiences influx of smuggled cigarettes, which
the industry suggests account for more than 15% of the market.
The retail prices of cigarettes are already higher than in its
neighbors Romania, Serbia, Macedonia and Turkey.
Legal purchases of cigarettes in duty-free shops have risen by
24% for the first 6 months of 2006.
Prague, 20 September 2006
Impact of Applying EU Cigarette Tax
Regime in Bulgaria
3. Reduction of purchases of domestic brands, which
harms domestic tobacco producers and
manufacturing workers.
 Bulgartabac’s sales fell by 24% on an annual basis in the
first half of 2006, while revenues from core operations fell
by 48%.
 Substitution from Bulgarian brands to imported brands –
Serbian and Turkish brands are mainly preferred by
Bulgarian smokers due to their price and quality
characteristics.
Prague, 20 September 2006
Impact of Applying EU Cigarette Tax
Regime in Bulgaria
4. Fiscal losses due to less revenues from direct and
indirect taxes.
 The increase of smuggling and sales in duty-free shops means less
VAT and excise taxes paid to the government – in the first half of
the year, revenues from excise duties accounts for 45% of the
expected annual excise revenues for 2006. In comparison, all
other tax revenues account for more than 50% of their annual
expected levels.
 Less consumption of legal cigarettes means forgone amount of
VAT payments.
 Losses in tobacco industry means less corporate tax payments.
Prague, 20 September 2006
Impact of Applying EU Cigarette Tax
Regime in Bulgaria
5. Undermining of public confidence in the fairness of the tax
system.
6. Taxes hurt the poor much harder than the rich – cigarette
excise duties are discriminatory and highly regressive.
Prague, 20 September 2006
Impact of Applying EU Cigarette Tax
Regime in Bulgaria
7. Privatization of the state-owned cigarette companies will be
even harder in such an environment – tax harmonization
impedes competition in the sector and set rules that are not
in the interest of all market players.
8. Higher taxes increase incentives for fraud, bribery and
corruption practices.
Prague, 20 September 2006
Smuggling of cigarettes in Europe (1995)
Source: WHO, The Tobacco Atlas, 2002
http://www.who.int/tobacco/en/atlas20.pdf
Prague, 20 September 2006
Thank you for your attention!
Adriana Mladenova
Institute for Market Economics, Bulgaria
www.ime.bg
Prague, 20 September 2006