Tobacco firms warn on mismanagement for GCC selective tax

Regulators in the GCC need to recognize and address potential issues that may arise during the roll-out of a region-wide tax on tobacco and soft drinks, such as stockpiling goods or consumers buying illicit alternatives, tobacco company executives told Argaam.

“While the new tax is clearly intended to raise the price of cigarettes in the GCC, it is critical that any potential disruption around such price changes is minimized, and the nature of the changes are clearly communicated, so as not to increase the potential for consumers to be tempted to purchase from the illicit trade,” said Ross Parker, senior economist at UK-based Imperial Tobacco Limited, which owns the Davidoff cigarette brand.

Implementing a new tax system in one country is challenging, but rolling it out in multiple countries on different timescales multiplies the complexity involved, he said.

“We hope that the potential for abuse – for example, seeking exemptions for cigarettes supposedly sold ‘for heating,’ or by stockpiling goods at pre-tax prices to capture windfall profits – is recognized and addressed firmly by regulators,” Parker added, noting that failure to tackle stockpiling would result in allowing “a direct transfer of public revenue into private profit.”

Earlier this month, Saudi Arabia’s Shura Council approved a draft law to impose a tax on tobacco goods and beverages, under a unified selective tax agreement that has been approved by all six member states of the Gulf Cooperation Council (GCC). The kingdom expects to impose the tax in Q2.

Under the system, a 50 percent tax will be applied to soft drinks, while a tax of 100 percent will be levied on tobacco and byproducts, as well as energy beverages.

US tobacco giant Philip Morris International, which owns the Marlboro brand, also warned against potential illegal practices.

“Cigarettes should not be taxed beyond the point where consumers will start buying illicit products instead of going through legal retail channels. This in turn provides a lucrative incentive for criminal organizations to counterfeit and to smuggle excisable goods,” Tarkan Demirbas, area vice president for Philip Morris Middle East, told Argaam.

Such a situation would cause the government to lose tax revenues, in addition to increasing pressure on legal tobacco trade and industry channels.

“Many experts believe that a specific tax applied to quantity of cigarette or weight of tobacco sold is the best way to generate and increase government revenue stream without causing illicit trade and jeopardizing the legal duty-paid market,” Demirbas said.

Write to Jerusha Sequeira at jerusha.s@argaamnews.com