Another reason to quit
By Timothy Sifert
Cigarette companies are forever under fire from health professionals, lawyers and other campaigners. Now it looks like European Union excise laws will be next to lay into local tobacco companies' profit margins, recently squeezed by black market brands, a growing distaste for smoking and the country's economic slump.
EU membership pledges to be a nuisance for the country's tobacco companies as the government draws up a new substantive excise duty law that, by 2008, could double the consumer price of some cigarette brands, as the state steadily increases duties to match those in existing EU member states.
The problem stems not only from the large increase in excise tax, which will rise from the current €25 per 1,000 cigarettes to the EU norm of €64, and will be based on the most popular price category. At issue - and drawing the ire of most cigarette manufacturers - is the much-debated way in which the excise increases will be implemented. It's almost taken for granted that smokers' consumption levels will fall as a result of increased taxes, as locals' purchasing power almost surely won't grow at the pace of prices.
As a result, companies want to control the mechanism through which tobacco prices will rise, so as to maintain their customer base and stay competitive.
"Excise has to go up," acknowledges Chris Sijtsma, president of British American Tobacco Polska (BAT), which produces such brands as Pall Mall and Lucky Strike. "This will have a major effect."
Jacek Olczak, managing director of Philip Morris Polska, the country's largest tobacco concern, agrees and adds, "This (tax) is not a surprise, but the big question will be 'How do we reach that €64?'"
The excise mechanism proposed by the government has two possibile components: increasing taxes by a specific rate, or tying the increase to a percentage of the brand's actual price, known as ad valorem taxation. The argument is that if the government opts to raise the tax to a specific set rate, regardless of price, cheaper cigarettes will experience sharper increases. Should the government opt for the ad valorem structure, the more expensive cigarettes will lose out.
Parliament is to begin reading the bill, which was just passed by the council of ministers.
"The solution is not ready yet," said Dariusz Brociek, deputy director of the excise department in the ministry of finance.
He assured that the government knows well that the new law will have a severe effect on the industry: the price of tobacco could rise even by 100 percent, Brociek said. But it's also likely, they say, that the law would give the finance ministry some freedom in rehashing the excise tax mechanisms on an annual basis.
Most local companies are opting for a wait-and-see tactic on the law prior to initiating any new business strategies that would deal with the increasing prices of their products, as they expect the law to be a combination of specific rates and ad valorem.
"We propose the implementation of an intermediate, neutral model that is for all cigarette manufacturers and is based on an even increase of both excise rates," said Grażyna Sokołowska, director of corporate and legal affairs at Reemtsma Polska, the number two player on the tobacco market. "An even increase means a raise of both rates by the same index or percentage."
However, Sokołowska pointed out that the government's strategy thus far has been more prohibitive for "cheaper brands."
"Since the introduction in mid-2000 of the mixed excise system, the prices of expensive brands have gone up three percent, while the prices of their cheaper counterparts have increased by more than 33 percent," she said, adding that cheaper brands in the same time period lost some 10 percent of their market share.
In that context, a group of six tobacco companies, including Reemtsma, recently banded together to lobby in favor of tipping the excise mechanism more toward the ad valorem method.
However, BAT, which offers a variety of price ranges and products, finds fault in some competitors' arguments.
"There is a group of manufacturers who favor the excise structure driven by the increase in the variable component, because they say that it's good for their cheaper-priced products, and that this is good for the Polish farming community because cheap products (mainly) consist of local leaf," said Sijtsma.
He pointed out, though, that "surprisingly enough, those companies have substantially reduced the level of local leaf in their brands."
