A template for taxing heated tobacco products has emerged

Non-combustible tobacco products that generate vapor for inhaling by heating tobacco are growing in popularity around the world. Most of the growth has taken place outside the United Stated, primarily in Europe and Asia.

Although these products contain tobacco, their innovative technology and functionality make them ill-suited to traditional tax categories in excise laws and Customs codes. Recognizing this anachronism in tax legislation, fiscal authorities in an increasing number of countries have updated their excise laws, developing new products classifications with their own taxable bases and tax structures.

Italy and Portugal were the first two countries to adopt excise taxes for heated tobacco products in the closing weeks of 2014. Legislation in both markets was amended to include heated tobacco among products subject to taxation. However, each market took a different approach to identifying the tax base and setting the tax rate.

In Italy the rate of tax on heated tobacco products is set at 50% of the excise burden on an equivalent quantity of cigarettes according to a complex formula identified by the Customs and Monopoly Agency (AAMS) based on a comparison of the average time of consumption (ATC) of 5 brands of cigarettes and the ATC of the inhalation product in question, that is, the particular SKU of the heated tobacco product.

In Portugal, although the amended legislation defined heated tobacco in a separate new category, for purposes of setting the tax rate the Parliament opted to combine heated tobacco in an omnibus category of heterogeneous tobacco products such as chewing and smoking tobacco. Thus, a mixed tax structure partially based on the weight of tobacco and partially on the retail price is applied.

Towards a new template

These early efforts reflect a degree of experimentation as well as a dependence on existing tax structures and rates that are known and tested. However, subsequent efforts to tax heated tobacco products have adhered to a simple, less complicated model. Starting in Serbia in 2015 and followed quickly by Latvia and Slovenia in 2016, Parliaments across Europe have added new categories of “heated tobacco” or tobacco that is “intended for heating” to their excise tax laws. Application of a specific tax based on the weight of tobacco has become the norm. This is logical and facilitates tax administration given that heated tobacco products come in different presentations, such as sticks or pods, in which the amount of tobacco, the common factor in all products, differs according to the format.

Thus far in 2017, Croatia, Romania, Greece, and Russia have all adopted the new tax template for heated tobacco products. Rates may vary but in nearly all cases the level of tax on heated tobacco is set so as not to exceed the lowest tax on combustible tobacco products. In each instance, however, the structure of the tax is specific based on the weight of the tobacco mixture which is heated in order to create a vapor.

Hungary’s amended excise law defines heated tobacco as a novel tobacco product (“NTP”), adopting the nomenclature of the European Commission’s revised Tobacco Products Directive. Although in most respects it adheres to the model followed by its European neighbors, Hungary’s law is an exception in that it mandates a specific tax be applied per stick of heated tobacco product.

The European Commission has not yet addressed the taxation of heated tobacco products. Discussions underway to reform Directive 2011/64/EU, the so-called Tobacco Excise Directive, may set forth a basic taxation framework in the near future.

Meanwhile, more and more countries are acting independently by reforming national excise laws that tax heated tobacco products along the lines of the emerging template. On May 1, the Slovak Republic will become the most recent country in Europe to follow this trend. A new specific tax, approved by Parliament in October 2016, will be levied per kilogram of tobacco mixture.

In Asia, both South Korea and Kazakhstan have introduced specific excise taxes based on the weight of the heated tobacco mixture. Notably, in Kazakhstan, where the rate is set at zero per kilogram of heated tobacco, periodic excise tax reporting is required. This permits national tax authorities to keep track of consumption volumes and trends.