Tobacco profits up in smoke after tax hike
The Finance Ministry increased import duty on raw tobacco from 30% to 105%, taking the minimum duty from €1.13 per kilogram to €2.17 per kilogram in a bill passed by the cabinet on Sept. 5 that became law on Sept. 13 and will be in full effect next week following a week's vacatio legis. Investors in Poland's tobacco industry feel betrayed by the move, which is perceived across the industry as helping to bolster budget revenues rather than helping domestic growers.
"We don't know what the real reason behind this is, but it goes against the idea of an effective two-way dialogue," said Marco Terribilini, the president of U.S. tobacco firm Philip Morris in Poland. "We have invested tens of millions of złoty with our farmers to develop the local agronomy and to improve the tobaccos grown in Poland."
In its negotiating position in European Union (EU) accession talks on agriculture, Poland has asked for a national production quota of 70,000 metric tons. But with the sales of domestic growers falling from 27,350 tons in 2001 to 26,070 tons this year, the government needs to encourage cigarette makers to buy more Polish tobacco in order to make its EU demands more realistic.
The government hopes to swell the profitability of Polish tobacco growers by increasing the use of production capacity at tobacco plantations, and help to maintain current employment levels, according to the text of the revised tobacco import bill.
"This year imports of unprocessed tobacco remain high," the bill states. "Consequently tobacco companies are not interested in buying domestically produced tobacco."
But the quantities of tobacco cigarette makers buy from domestic growers are not determined by the prices of imports, but by the blend composition of their products, tobacco makers argue. Since blends must remain constant to maintain consistent quality, Philip Morris, which currently buys around 50% of Polish tobacco production, will not substitute tobacco imports for domestic tobacco, Terribilini said.
"Poland will never be in a situation where we can wholly use their tobacco for our international products, so we will continue to depend on imported tobacco," he said. "We have a defined level of domestic tobacco requirement ... Our blend composition defines what we use."
Additionally, tobacco growers and cigarette manufactures are not convinced that the duty increase will help Poland negotiate a 70,000-ton production quota with the EU.
"This is a little unrealistic," said Jerzy Skiba, the project manager at the National Tobacco Industry Association (KSPT). "If Polish tobacco firms were to utilize a 70,000-ton quota, the cigarettes sold in this country would have to contain 100% domestically produced tobacco."
Terribilini argues that the measure is too short-term to offer any genuine support for tobacco growers, since Poland will have to cut back the duty to EU levels upon its EU accession.
"The government is moving in a direction that is not solving the problems of tobacco producers," Terribilini said. "On the contrary. Poland initially had a 30% duty; in the EU the import duties are between 11%-18%, so as Poland will have to come down to the EU level on accession, it is taking the wrong direction."
In the worst scenario the duty will actually lead to a decline in the sales of cigarettes made in Poland, further depressing demand for domestically grown tobacco.
"The danger is that if the new duty level leads to an increase in prices, it will widen the price gap between cigarettes manufactured in Poland and illegal imports," Skiba said. He added that sales of smuggled cigarettes have remained at 2001 levels this year, representing around 20% of Polish cigarette sales, according to KSPT research.
