How should heated tobacco be taxed?

Competition among producers of heated tobacco products is, well, heating up. PMI’s iQOS, BAT’s Glo and JTI’s Ploom Tech have all been launched in Japan and other test markets in order to capture a share of the millions of smokers switching to non-combustible alternatives. Korea Tobacco & Ginseng Corporation recently announced that it was joining the fray.

Although these devices each employ their own distinctive technologies, they share many basic features. They all contain tobacco and must therefore be considered tobacco products. However, they are smokeless products. The tobacco is not burned; thus, these products are not smoked and it follows that they should not be taxed as smoking tobacco.

Define the taxable base

How then should these products be taxed? The first step in taxing a product is to identify precisely what is being taxed. Heated tobacco products, also called heat-not-burn products, consist of an electronic device or other heat source that warms the consumable portion containing tobacco. The devices themselves are consumer electronics and accordingly should be exempt from tobacco taxation. Logically, that leaves the consumable tobacco as the object of taxation.

Next, some measurement of the tobacco needs to be defined in order to calculate the tax. In the case of cigarettes, which are relatively homogeneous in terms of content (fine cut tobacco leaf) as well as the length and circumference of the individual sticks, a fixed number of units, such as 20 (a pack) or 1000 serves as the base for levying the tax. This is convenient and transparent for tax administrators and consumers alike.

Tobacco for heating, in contrast, comes in a variety of formats. Depending on the brand and manufacturer the tobacco may be contained in capsules or sticks in the form of granulated or reconstituted leaf with humectants added to facilitate the creation of vapor when heated. Some devices heat the tobacco directly while others first electronically heat a liquid to generate a vapor which passes through the tobacco where it acquires flavor and nicotine.

Given the wide variety of heated tobacco platforms it would be difficult and imprecise to define a common “unit” as the taxable base for all formats.

Weighing the alternative

A more realistic and manageable alternative approach is to tax the net weight of the tobacco mixture contained in all product offerings. Tobacco remains the common element in all heated tobacco products and can easily be measured by weight expressed in kilograms. A kilo of tobacco mixture irrespective of the format constitutes a quantifiable and transparent tax base. When a specific rate of excise tax is applied to this base it is a simple matter to calculate the amount due as is customarily done with snus and other tobacco products.

Each product presentation contains a standard weight of tobacco mixture that can readily be verified by the tax authorities through periodic sampling. Regulations that require manufacturers to print the tobacco weight on the packaging communicate comparable information to consumers, regulators and tax authorities. Enforcement is facilitated as the authorities need only to know the rate of excise and the weight of tobacco contained in a product in order to determine the amount of tax to be collected.

Taxation in Practice

In just the past few years more than a dozen countries in Europe and Asia have expanded the scope of their tobacco excise taxes to include heated tobacco products. Legislators have created new tax classifications to distinguish these products from traditional combustible tobacco. In most cases, these categories emphasize that these products are heated rather than burned. In Italy and South Korea the laws identify these products as intended for inhalation without combustion.

Despite having been one of the first countries to introduce a “heated tobacco” category in its excise law, Portugal levies the same mixed tax structure on these products as it applies to chewing and smoking tobacco. All other markets apply a specific rate of excise tax to their heated tobacco products as shown in Table 1.

Country Tax Category Excise Structure Tax Base
Croatia Heated tobacco Specific Weight
Greece Heated tobacco Specific Weight
Hungary Novel tobacco products Specific Stick
Italy Inhalation product without combustion Specific Depends on SKU
Kazakhstan Heated tobacco Specific Weight
Latvia Heated tobacco Specific Weight
Portugal Heated tobacco Mixed: specific and ad valorem Weight & retail price
Romania Heated tobacco Specific Weight
Russia Heated tobacco Specific Weight
Serbia Tobacco that is heated but not combusted Specific Weight
Slovak Republic Smokeless tobacco Specific Weight
Slovenia Manufactured tobacco intended for heating Specific Weight
South Korea Inhaling tobacco products using electronic devices Specific Weight

Source: taken from national legislation, customs rulings

The state of Israel announced in June that it would equalize taxes on heat not burn products to those on traditional cigarettes. However, this decision appears to be based on a policy to protect the local Dubek tobacco company and not on any underlying fiscal or health rationale. Indeed, taxing heated tobacco products at the same level as traditional tobacco has little or no justification given the reduced risk profile of these new alternatives to smoking.

For the most part however, a consensus is emerging that a simple and transparent tax based on the weight of the tobacco, with a specific rate lower than the tax applied to smoking tobacco makes the most sense for both tax administrators and consumers. High levels of taxation would lead to higher retail prices and could jeopardize the viability of this innovative product category which is still in its infancy.


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Categorised in: Excise tax, Heated tobacco

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