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August 14th, 2015:

Stubbing out a habit by way of new taxes

Gulf states should enforce high excise duties on cigarettes and tobacco consumption

By Dr. Nasser Saidi, Special to Gulf News

Government spending in the Gulf 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 per cent of government revenue.

This high dependence makes the Gulf countries highly vulnerable to oil price fluctuations, with the recent decline 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 per cent of GDP) in 2015 from a surplus of $76 billion (4.5 per cent of GDP) a year ago.

To address their revenue vulnerability and fiscal sustainability, Gulf countries should prioritise fiscal reform and put in place policies to diversify the sources of government revenue. Revenue diversification policies should be directed not only at mobilising non-oil revenue in the short run, but also at improving the buoyancy of tax revenue.

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 Organisation (WHO) and Tobacco Free Initiative (TFI), a 10 per cent price increase on a pack of cigarettes would be expected to reduce demand for cigarettes by about 4 per cent in high-income countries and by about 5 per cent 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, Gulf 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.

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 per cent 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 per cent 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 population among Gulf states, is the largest market for the cigarette industry, closely followed by the UAE.

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). Earlier this month, the Gulf states 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 Gulf countries from raising the common external tariff on cigarettes and other tobacco products. As members of the WTO they have to comply with their treaty commitments and with a maximum import duty, known as the ‘bound’ rate.

The current 100 per cent 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 10-year time frame (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.

The uniform system of cigarette taxation places the Common External Tariff at 100 per cent 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 towards the government revenue base. It was first introduced by Saudi Arabia in the 1990s and was fully harmonised among Gulf Cooperation Council 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.

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 outsourced to customs, which then becomes ‘customs and excise’.

Additionally, there should be GCC policy harmonisation, i.e., introduction of tobacco excise taxes should be applied uniformly (including on domestic production), equally and in synchronised manner in all countries to prevent arbitrage opportunities and illicit trade or smuggling. The process of implementation of the new tax structure should also be gradual.

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.

The writer, President of Nasser Saidi & Associates, is a former Chief Economist and Head of External Relations at DIFC Authority and Executive Director of Hawkamah, The Institute for Corporate Governance and Mudara Institute of Directors.;

Health priorities should be set with preventative measures to the fore


Adoption of 25X25 goals is big plus, writes Joshua Bird

‘An ounce of prevention is better than a pound of cure.” This idiom that has its roots right back to the founder of modern medicine, Hippocrates, in ancient Greece, yet it is all the more pertinent in modern-day Scotland.

As the NHS in Scotland and across the UK faces increasing pressures to deliver for the nation, societal changes – such as an ageing population and rapid urbanisation – combined with the globalisation of unhealthy lifestyles seek to deliver the perfect storm that might just break the institution of free health care at the point of entry.

A total of 75 per cent of all premature deaths in Scotland however are caused by diseases that are largely preventable; diseases such as coronary heart disease, cancers, stroke, chronic obstructive pulmonary disease (COPD) and diabetes are all known to have roots in a combination of lifestyle and societal choices. They are chronic medical conditions that are non-transmissible, slow progressing and long lasting and are known as non-communicable diseases (NCDs).

So great is the global burden of these NCDs – the leading cause of death globally with 38 million people dying from one, or a combination, of the diseases above in 2013 – the international community came together to develop the World Health Organisation’s (WHO) 25 per cent by 2025 framework on non-communicable disease.

The framework prescribes seven targets that national governments should seek to achieve by the year 2025 and by doing so would reduce the rate of deaths by NCDs by a quarter globally. The targets, as defined by WHO, seek to address lifestyle choices that would deliver a risk reduction in any of the diseases mentioned above. They include targets on smoking, alcohol consumption, physical activity, salt intake, obesity, diabetes and hypertension.

By reaching these targets in Scotland we could prevent as many as 3,800 premature deaths a year, a cause very much worth pursuing. So where now for prevention in Scotland?

The Scottish Government has of course made efforts in this field for a number of years now with strategies abound on issues such as obesity, alcohol abuse, tobacco use and many more. The government also has focuses on cancer prevention, heart disease prevention and many other areas.

However, it would seem, given the close relationship between risk factors and disease, that the time has come for the Scottish Government to integrate health prevention, much as it has done with health and social care delivery in recent months.

A sporadic and isolated approach to NCD prevention simply leads to sporadic and isolated success. The opportunity is now for Scotland to not only lead the UK but lead the world in adopting the WHO targets as national priorities; to recognise the economic and more importantly human cost of inaction and tackle the biggest causes of premature death in Scotland.

• Joshua Bird is policy & public affairs officer for the British Heart Foundation Scotland

Public health must be protected in Transatlantic Trade and Investment Partnership

Public health is under threat from the Transatlantic Trade and Investment Partnership (TTIP) that is being negotiated between the EU and the United States. A mechanism called ‘ISDS’ would allow companies to sue governments for compensation if a public health policy restricted their business operations. For instance, it is feasible that a tobacco company could sue a sovereign state because of a tobacco control law.

The Irish Cancer Society recently published ‘TTIP, ISDS and the Implications for Irish Public Health Policy’. This is a major report into how the investor-State dispute mechanism (ISDS) in the trade agreement between the European Union and the United States could potentially affect the ability of the domestic parliaments to pass laws that will reduce the cancer rate and save lives.

The report is available in two formats:

· The Executive Summary & Recommendations are available below

· The Full Report is available below

We would like members of the FCA in Europe and the United States to share this report with lawmakers and look at how TTIP and ISDS could affect public health policy in your country.

We want:

. The removal of any form of ISDS mechanism from the proposed agreement

· The removal of the Regulatory Cooperation Body (RCB) from the proposed agreement – which is designed to extend the scope of TTIP in the future

· A transparent, ethical, human rights-based agreement that serves to increase standards of public health rather than erode them

As many of you know, Ireland has recently been pressing ahead with measures to reduce the smoking rate by passing laws to introduce standardised packaging of tobacco in 2016. This is being challenged in the domestic courts by Japan Tobacco International (JTI) in an attempt to block, amend and delay plain packs.

They are arguing that their business interests have been negatively affected and should be paid compensation. The reality is that tobacco companies already force the State millions of Euro in health costs; it is unthinkable that they believe they are due money because fewer people are choosing to smoke.

The Irish Cancer Society is confident that in a domestic court of law, public health will trump the rights of such companies.

The Transatlantic Trade and Investment Partnership (TTIP) could change this by introducing an investor-State dispute settlement (ISDS) regime that would allow tobacco companies to bypass the domestic courts and seek compensation in front of a three-member arbitration panel.

It is via ISDS that Australia is being sued by tobacco companies for their extremely successful introduction of standardised packaging of tobacco, and why in turn other countries who want to introduce the measure have delayed their plans thanks to the threat of expensive litigation.

Big Tobacco will use every mechanism available to try and slow the decline in smoking in Europe and the US. Introducing ISDS or similar would allow these companies another avenue to challenge legislation that will reduce tobacco-related deaths.

It is for these reasons the Irish Cancer Society commissioned Dr Joshua Curtis of the London School of Economics and Dr John Reynolds of Maynooth University, Ireland to investigate the effect of such a mechanism on public health policy in Ireland.

Negotiations on TTIP are continuing with promises being made by the European Commission to replace ISDS with a similar, alternative mechanism. It remains to be seen what this will entail but our report clearly shows that TTIP can exist without an investor-State dispute resolution.

This is highly important in our battle against Big Tobacco.

The latest reports from Australia show the State has so far had legal fees of AU$50 million (€30 million) in defending plain packaging against Philip Morris International in an ISDS case without conclusion.

Under TTIP, this could become the norm in more and more countries. By ensuring public health policy is protected, we would be ensuring one less tool for Big Tobacco to use in challenging the fight against tobacco related disease.

Please bring this report to the attention of decision-makers in your country.

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