TOBACCO TAXATION IN TURKEY MODELING THE LONG An Overview of Policy Measures and Results TERM HEALTH AND COST IMPACTS OF REDUCING SMOKING PREVALENCE THROUGH TOBACCO TAXATION IN Volkan Çetinkaya Senior Economist, the World Bank, HNP Global Practice, Washington D.C. UKRAINE Patricio V. Marquez Lead Public Health Specialist, the World Bank, HNP Global Practice, Washington D.C. Discussion Brief Abstract Turkey’s government increased tobacco tax revenue and lowered tobacco consumption by increasing tobacco tax rates significantly between 2003 and 2013. However, both per capita tobacco consumption and total cigarette sales in Turkey have begun to increase again in recent years. Although the recent rise in cigarette sales might be attributed to the influx of Syrian refugees into Turkey, our analysis reveals other factors. First, average cigarette price increased more slowly than inflation. Thus, cigarettes became relatively cheaper compared to other goods and services. Second, cigarette affordability has increased. Turkey’s economy has grown steadily, and the demand for cigarettes has risen as the population has become wealthier over time. Turkey’s experience in managing these challenges offers lessons for successful tobacco taxation. Turkey also provides a good example of the feasibility of increasing tobacco taxes, while combatting the illicit tobacco trade. Acknowledgements Support for the preparation of this report was provided by the World Bank’s Global Tobacco Program, co-financed by the Bill and Melinda Gates Foundation and the Bloomberg Foundation. We are grateful to Ilker Dastan, Sheila Dutta, Alan Fuchs, Teh-Wei Hu, and Roberto Iunes for providing comments and to Marjia Jannati for excellent research assistance. The findings, interpretations, and conclusions in this paper are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the countries they represent. Washington, D.C. April 2017 Contents 1. Introduction 4 2. Political Economy of Tobacco Taxation in Turkey 6 3. Economics of Tobacco and Tobacco Control in Turkey 9 3.1. Tobacco Taxation 11 3.2. Relative Prices and Tobacco Consumption 13 3.3. Income and Tobacco Consumption 17 3.4. Government Revenue from Tobacco Taxes 19 3.5. Illicit Tobacco Trade 21 4. Lessons Learned 25 5. References 27 3 01. Introduction Turkey bears a high burden of tobacco consumption. A quarter of all deaths in the country, more than 100,000 deaths every year, can be attributed to tobacco-related diseases. About 21 million Turkish people, more than one- fourth of the country’s population, currently smoke. Turkish smokers spend around 12 billion USD annually on tobacco products: four times the annual budget of the Ministry of Health (Kose 2016). The burden of tobacco consumption and related health costs has been a powerful motivating factor for tobacco control in Turkey. Tobacco control measures led to decreases in consumption over the years until 2013. However, a recent rebound in consumption to an overall rate of 27 percent has raised fresh concerns. In 2010, among men ages 25-54, around half were smokers, while less than 20 percent of females in the same age group smoked. Of all men, 39 percent smoked in 2010. That rate fell to 35.9 percent in 2012, but then rose again to 41.8 percent in 2014. Similarly, 12.3 percent of all women smoked in 2010, with the rate dropping to 10.8 percent in 2012, before rebounding to 13.1 percent in 2014. Thus, between 2012 and 2014, smoking rates among males in Turkey rose by six percentage points and among females by 2.3 percentage points (Kose 2016). Table 1. Smoking Rates in Turkey AGE 2010 2012 2014 GROUPS MALE FEMALE TOTAL MALE FEMALE TOTAL MALE FEMALE TOTAL 15–24 27.1 6.1 16.4 24.1 4.6 14.3 31.4 5.7 18.5 25–34 48.2 17.0 32.7 45.9 14.9 30.5 51.2 18.8 35.1 35–44 49.2 19.5 34.5 44.4 17.3 30.9 49.9 19.7 34.9 45–54 43.7 13.8 28.8 42.0 13.4 27.7 48.7 16.5 32.7 55–64 32.7 8.8 20.4 27.9 7.4 17.4 38.2 10.2 24.0 65–74 20.6 4.2 11.2 17.8 3.8 10.1 22.4 3.4 12.1 75+ 15.1 0.9 7.3 12.6 0.8 5.6 8.9 2.4 5.0 TURKEY 39.0 12.3 25.4 35.9 10.8 23.2 41.8 13.1 27.3 The majority of current smokers began smoking as teenagers, with more SOURCE Health Statistics than 75 percent starting before the age of 20. Persons aged 15-19 are the Yearbook 2016 most vulnerable, accounting for 48 percent of smoking initiation. Of note, however, almost one in four Turkish smokers started between the ages of 10 and 14. Boys ages 10-14 are more vulnerable than girls ages 10-14, with data 4 Tobacco Taxation in Turkey: An Overview of Policy Measures and Results indicating that more boys in this age range started smoking, as compared to female cohorts. After age 14, however, women had consistently higher rates of smoking initiation than men in each age category. For example, from ages 20-24 more women than men started smoking. SOURCE Table 2. Smoking Initiation Age in Turkey Health Statistics Yearbook 2016 SMOKING INITIATION AGE AGE MEN WOMEN POPULATION Less than 10 5.6% 1.5% 4.5% 10–14 26.3% 14.9% 23.1% 15–19 47.3% 48.9% 47.8% 20–24 15.5% 20.2% 16.8% 25–29 3.5% 6.7% 4.4% 30–34 0.7% 3.8% 1.5% 35+ 1.1% 4.0% 1.9% TOTAL 100% 100% 100% Clearly, tobacco consumption has both direct and indirect costs for the population. When consumption increases, so do health care costs. Tobacco consumption rates in Turkey correspond to incidences of cancer, especially lung cancer, in the population. Cancer incidence trends in Turkey between 2002 and 2014 indicate that males have been consistently more prone to cancer than females. Rates of cancer incidence among males, females, and the overall population were lowest in 2002, then increased sharply until 2009, when a peak was reached at 270 per 100,000 population for males, 173 for females, and 221 for the population as a whole. Since 2012, cancer incidence rates for both men and women have been decreasing. SOURCE Figure 1. Cancer Incidence in Turkey Health Statistics Yearbook 2015 5 Figure 2. Lung Cancer Incidence in Turkey SOURCE Health Statistics Yearbook 2015 Similarly, lung cancer incidence trends in Turkey between 2002 and 2014 indicate that males have been consistently more prone to lung cancer than females. Rates of lung cancer incidence were lowest in 2002, then increased until 2009, where a peak was reached at 66 per 100,000 population for males, 8.1 for females, and 37 for the total population. Lung cancer incidence for males fell between 2009 and 2010. Subsequently, male lung cancer incidence has again been decreasing since 2011. For females, incidence increased slightly in 2011, but has remained stable at around 10 since then (Kose 2016). This study will first provide an analysis of the political economy of tobacco taxation in Turkey, then explore the economics of tobacco and tobacco control in the country in recent years. Our main aim is to determine how Turkey has achieved remarkable results since the introduction of the country’s first tobacco law in 1996. In the economics of tobacco section, the focus will be on tobacco taxation, affordability, and illicit trade. The report will conclude by summarizing key takeaway messages that may provide guidance for other nations embarking on strict tobacco control measures. 02. Political Economy of Tobacco Taxation in Turkey Due to the health and economic burden of tobacco use, Turkey’s government has been strongly motivated to initiate polices and reforms to curtail tobacco consumption. The Ministry of Health, Ministry of Interior Affairs, Ministry of Customs and Trade, Ministry of Finance, universities, and NGOs have worked together using a multi-sectoral approach in the fight against tobacco. 6 Tobacco Taxation in Turkey: An Overview of Policy Measures and Results Table 3. Timeline of Key Tobacco Control Initiatives in Turkey YEAR Non-Price Tobacco Control Initiatives in Turkey 1996 First tobacco control law, Law 4207 on Prevention of Harms of Tobacco Products, enacted 2004 WHO Framework Convention on Tobacco Control (FCTC) ratified 2008 Smoking ban implemented for public workplaces 2010 Text and graphic warnings on cigarette packages began 2010 Smoking cessation service launched including 171 Quit-line and free distribution of medications 2012 Total ban on advertisement and pictorial warning labels to cover at least 65% of the box implemented 2013 Highest implementation score for all of WHO’s FCTC and MPOWER measures attained 2014 Protocol to Eliminate Illicit Trade in Tobacco Products signed 2015 New National Tobacco Control Program and Plan of Action began 2017 Green Detector, a digital measure against smoking, is integrated into 184 hotline to report smoking ban violations 2017 Plain package implementation is planned to be implemented Despite Turkey’s history of heavily regulating tobacco production, the country’s first wide-ranging tobacco control law was only enacted in the late 1990s. In 1991, then-President Ozal had vetoed an earlier anti-tobacco bill, arguing that the advertising ban it included went against free trade (Bilir et al. 2009). When a revised tobacco control bill was submitted to Parliament in July 1992, members of the Justice Commission found the health evidence with regard to smoking inadequate, and therefore rejected the bill. Several years later, in 1996, the General National Assembly and the President finally approved the bill, and Law No. 4207 “Concerning the Prevention of Hazards of Tobacco Products” was enacted in November 1996. In regards to tobacco control activities, Law No. 4207 was a crucial achievement and a milestone for Turkey. The law prohibited all tobacco advertisements and all sales of tobacco products to children under age 18. It also targeted key public spaces, banning smoking in all health and educational institutions and on public transport, such as buses and aircraft. The legislation also restricted smoking in other public buildings. In addition, it required broadcast media to transmit programs on the hazards of smoking for 90 minutes every month. Moreover, the law imposed warning labels on cigarette packages. Despite these many advances, Law No. 4207 was not all- encompassing. Under the legislation, smoking was prohibited in some public places, but restaurants, bars, and cafés remained vulnerable. 7 This made smoking a persistent public health issue in these spaces and posed workplace risks for persons in the hospitality industry. The new law faced challenges. The tobacco industry made numerous attempts to overturn the advertising ban, since it posed a serious threat to companies’ marketing strategies. Industry representatives rapidly developed plans to engage the government’s Justice Commission in negotiations. Industry leaders proposed to sponsor a youth project for the Ministry of Education in return for rescinding the ban (Bilir et al. 2009). In a second attempt, a few months later, they tried to hold an open-air event to promote the tobacco industry in Ankara. The Governor of Ankara halted this event as a clear violation of the advertising ban. The industry pursued legal action, filing a suit claiming that the ban was unconstitutional. A lower court deemed this a serious claim, and the issue was referred to the Constitutional Court. In April 1999, the Constitutional Court ruled that the ban on advertisement did not violate the Turkish constitution, considering in particular the importance of the public’s health (Bilir et al. 2012). In April 2004, the Minister of Health signed the WHO Framework Convention on Tobacco Control (FCTC), and the Grand National Assembly approved it in November 2004. In 2006, a proposal for implementation of the FCTC was developed and presented to Parliament. After a lengthy parliamentary procedure, Law No. 5727 was finally accepted in January 2008. Law No. 5727 amended some relevant articles found in the earlier Law No. 4207, for example broadening provisions regarding penalties. The new law extended the range of public places where smoking was banned to include school premises and all hospitality workplaces. Sale of tobacco products within schools and on their premises was prohibited. Tobacco company sponsorships were banned, on top of the previous ban on advertising and promotion already found in Law No. 4207. Once again, the tobacco industry launched a lobbying campaign, arguing that these measures would have a detrimental effect on the hospitality industry, a key part of the Turkish economy. Subsequently, ministries, universities, and many NGOs collaborated to prepare the National Tobacco Control Program. The program incorporated a full array of elements to successfully decrease tobacco consumption. The program aimed to raise the proportion of people aged over 15 years who do not smoke to 80 percent, and to completely eliminate smoking in children under age 15. In December 2007, the Minister of Health publicly unveiled the National Tobacco Control Program for 2008–2012. 8 Tobacco Taxation in Turkey: An Overview of Policy Measures and Results Comprehensive and efficient national tobacco control activities require political commitment. In this regard, the Government of Turkey has been determined and successful over the past years. In 2013, Turkey became the first country in the world to attain the highest implementation score for all of WHO’s FCTC and MPOWER measures. Looking ahead, the Second National Tobacco Control Program, covering the period 2015-2018, has been prepared and published. The purpose of the program is to inform and educate the public on the health, economic, and social impacts of tobacco consumption. Under this updated program, smoking within five meters of the entrance of public spaces such as airports, bus terminals, shopping centers, movie theaters, and health care facilities has been forbidden. A symbol of Turkey’s political dedication to tobacco cessation was the declaration of 2016 as the “Year of the Fight against Tobacco.” 03. Economics of Tobacco and Tobacco Control in Turkey Turkey is the world’s 10th biggest tobacco producer, accounting for 1.2 percent of the global market. Despite the recent decrease in market share, Turkey still leads the cultivation of oriental tobacco with an annual production of approximately 60 thousand tons (Tobacco Report 2016). Law No. 4733, passed in 2002, defined the organization, structure, and duties of the Tobacco and Alcohol Market Regulatory Authority. This measure has resulted in a continuous reduction in tobacco production, in part because, under the legislation, tobacco farmers lost some of the price subsidies previously afforded to them. The privatization of the state-owned tobacco company, TEKEL, in 2008, exacerbated the decline in tobacco farming, since multinational tobacco companies, which began operating in Turkey in the 1980s, preferred imported tobacco to minimize their production costs. Multinational tobacco companies gradually increased their market share by aggressive advertising, promotion campaigns, and pricing strategies. These companies increased total cigarette production by 29 percent, from 120.9 billion sticks to 156.1 billion sticks between 2003 and 2015. However, the amount of domestic tobacco used in cigarette production declined from 46 thousand to 14 thousand tons, while tobacco imports significantly increased, from 63 thousand to 94 thousand tons. 9 Figure 3. Tobacco Used in Cigarette Production in Turkey SOURCE Tobacco and Alcohol Market Regulatory Authority Consequently, domestic tobacco production fell from 160 thousand tons of tobacco in 2002 to 62 thousand tons of tobacco in 2015. In addition, the number of tobacco farmers declined from 160 thousand in 2002 to 56 thousand in 2015, a decrease of 65 percent. In the past, tobacco played an important role in Turkey’s agricultural exports, but since 2012, Turkey has become a net importer of tobacco. In 2015, Turkey exported 54 thousand tons of tobacco netting 383 million USD, meanwhile it imported over 94 thousand tons of tobacco at a cost of 528 million USD. Turkey is also one of the largest tobacco consumers. Among OECD countries, Greece and Turkey carry the second-highest smoking rates, with more than 27 percent of persons over fifteen years of age declaring themselves to be daily smokers. Figure 4. Tobacco Consumption Among OECD Countries SOURCE OECD Health Statistics 2016 10 Tobacco Taxation in Turkey: An Overview of Policy Measures and Results 03.1. Tobacco Taxation The most cost-effective method of fighting against tobacco is through taxation, since people are responsive to monetary incentives. Significant price increases on tobacco products, through higher tobacco taxes, encourage current tobacco users to quit or reduce their consumption, while preventing uptake of tobacco practices in potential future consumers (Chaloupka, Yurekli, and Fong 2012). Although tobacco taxation is regarded as the most cost-effective anti-tobacco intervention, many countries have failed to make much progress in increasing the price of tobacco products by raising taxes, compared to the advances in other tobacco control strategies under the FCTC (World Health Organization 2015). Literature and research stemming from high-income countries generally indicate that a 10 percent increase in price reduces overall tobacco-product consumption by 2.5 to 5 percent. A recent consensus estimate confirms that a 10 percent price increase reduces consumption by 4 percent. The effect on tobacco consumption prevalence in low- and middle-income countries has been found to be even stronger (Kostova et al. 2014). The price elasticity of demand for cigarettes is estimated to be -0.41 in Turkey (Önder 2002). The same study shows that poor households in Turkey were more price sensitive (-0.47) compared to rich households (-0.16). Another study indicated that the total price elasticity was -0.67 in 2003, with poor households once again found to be more price sensitive than wealthier households (Önder and Yürekli 2014). The price elasticity of demand for cigarettes also varies based on the type of cigarette. While cigarettes in low- and medium-price segments are more sensitive to price changes, the demand for premium cigarettes is highly price inelastic in Turkey (Atuk and Özmen 2016). Since 2002, Turkey has significantly increased tobacco taxes. The effective total tax rate as a percentage of retail price in Turkey has increased from 64.8 percent in 2002 to 83 percent in 2017. The current tobacco taxation system in Turkey includes both ad valorem and specific excise taxes. However, the latter is not significant, and none of the tax is earmarked. Before 2002, only the Value Added Tax (VAT) was imposed on tobacco products. Turkey introduced a 49.5 percent ad valorem tax rate on cigarettes in 2002 and increased the ad valorem tax rate to 55.3 percent the following year. In 2004, Turkey introduced the specific excise tax, which varied based on the proportion of oriental tobacco used in order to protect domestic oriental tobacco farmers. The ad valorem tax was lowered to 28 percent (Yürekli et al. 2010). 11 The specific excise tax on cigarettes made with 0–24 percent oriental tobacco was set at 1.00 TL. Cigarettes containing 25–49 percent oriental tobacco were taxed 0.60 TL, those including 50–74 percent oriental tobacco 0.45 TL, and cigarettes containing 75–100 percent oriental tobacco were taxed 0.35 TL. To avoid high taxes and maintain affordability of their products, the tobacco companies increased the proportion of oriental tobacco in their cigarette production. Due to the perceived possible negative impact on tax revenue, the government increased the ad valorem tax to 58 percent, introduced a minimum tax floor, and eliminated the specific excise in 2005. Until 2009, the ad valorem rate was constant at 58 percent, but the minimum tax floor was gradually raised. Turkey increased the ad valorem tax rate to 63 percent and 65 percent in 2010 and 2011, respectively. Table 4. Tobacco Tax Burden in Turkey EXCISE TOBACCO TAXES YEAR AD VALOREM SPECIFIC EXCISE MINIMUM VAT1 TOTAL TAX BURDEN2 EXCISE TAX 2002 49.50% - - 15.25% 64.75% 2003 55.30% - - 15.25% 70.55% 2004 28.00% 0.35 TL– 1.00 TL - 15.25% 71.60% 2005 58.00% - 1.20 TL 15.25% 73.25% 2006 58.00% - 1.20 TL 15.25% 73.25% 2007 58.00% - 1.55 TL 15.25% 73.25% 2008 58.00% - 1.50 TL 15.25% 73.25% 2009 58.00% - 2.05 TL 15.25% 73.25% 2010 63.00% - 2.65 TL 15.25% 78.25% 2011 65.00% - 2.90 TL 15.25% 80.25% 2012 65.00% - 2.90 TL 15.25% 80.25% 2013 65.25% 0.0922 TL 3.23 TL 15.25% 81.52% 2014 65.25% 0.1300 TL 3.75 TL 15.25% 81.94% 2015 65.25% 0.1866 TL 3.94 TL 15.25% 82.37% 2016 65.25% 0.2468 TL 4.42 TL 15.25% 82.74% 2017 65.25% 0.3246 TL 4.56 TL 15.25% 83.00% 1. The actual VAT rate is 18 percent; here it is expressed as a percentage of the retail price the consumer pays. 2. Beginning 2013, the total tax burden is calculated for the best-selling brand. 3. The total tax burden is calculated for the best-selling brand. SOURCE Authors calculations based on data from the Ministry of Finance 12 Tobacco Taxation in Turkey: An Overview of Policy Measures and Results In 2013, Turkey reintroduced a specific excise, while increasing the ad valorem rate to 65.25 percent; however, the specific excise was not significant, only 0.092 TL (~ 0.05 USD). In 2017, the current specific excise tax is set at 0.325 TL (~0.085 USD), and the ad valorem rate remains at 65.25 percent, with the minimum 4.56 TL (1.215 USD) tax floor. 03.2 Relative Prices and Tobacco Consumption The prices of cigarettes in Turkey remain relatively lower than those in other countries of the WHO European Region, even after adjusting for PPP. The cheapest brands in the United Kingdom and Ireland, for example, cost more than twice as much as the cheapest brands in Turkey. Turkey’s best-selling brand is comparable in price to the highest-selling brands in Austria and Estonia, while in the United Kingdom and Ireland, the price of the highest- selling brand remains more than twice that of the most-sold brand in Turkey. SOURCE Figures 5 and 6. Prices of the Cheapest and the Best-Selling World Health Organization. Cigarette Brands in WHO EURO Countries “WHO Report on the Global Tobacco Epidemic, 2015: Raising Taxes on Tobacco.” Geneva: WHO, 2015. 13 Higher tobacco taxes are only effective in reducing tobacco consumption if they result in higher tobacco prices. Historically, there was a steady increase in cigarette sales between 1925 and 1998 in Turkey. Possibly as an effect of the tobacco law enacted in 1996, tobacco sales remained almost constant until 2008. Between 2008 and 2013, there was a significant decline in cigarette sales in Turkey; however, sales began increasing again after 2013. In 2014 alone, 94.7 billion cigarette sticks were sold in Turkey, and sales reached 103 billion sticks in 2015. According to the Ministry of Health Statistical Year Book, the percentage of smokers in the population increased from 23.2 percent in 2012 to 27.3 percent in 2014, in contrast to the decline observed in previous years. Figure 7. Cigarette Sales in Turkey One plausible explanation for the increase in cigarette sales is that cigarettes SOURCE Tobacco and Alcohol Market might be relatively more affordable, even if nominal price of cigarettes have Regulatory Authority been increasing. If the average price of cigarettes increases less than inflation, cigarettes become relatively cheaper; consequently, the demand for cigarette rises. As illustrated in Figure 8 below, the price index for cigarettes in Turkey increased more slowly than the consumer price index between January 2013 and June 2016. During that period, the relative price of cigarettes decreased compared to other goods and services. Therefore, the demand for cigarettes increased. Turkey’s per capita cigarette consumption rate had declined significantly, by 26 percent, between 2003 and 2013. However, the rate increased by 10 percent between 2013 and 2016, as the relative price of cigarettes fell. 14 Tobacco Taxation in Turkey: An Overview of Policy Measures and Results This has enabled the recent increase in consumption and sales. Turkey’s experience provides a key piece of evidence that tobacco taxes are ineffective if they do not lead to higher relative prices. Figure 8. Change in Average Cigarette Price Index vs. CPI SOURCE Authors’ calculations based on data from the Turkish Statistical Institute. Price-discrimination strategies give tobacco companies the ability to minimize the effect of higher tobacco taxes on their sales. The tobacco companies provide price promotions such as volume-based discounts, multipack offers, and coupons, in addition to setting up different price tiers to reach price-sensitive consumers such as youth and low-income individuals (Brock, Schillo, and Moilanen 2015; Chaloupka et al. 2002; Feighery et al. 2004). Price dispersion measures the gap between the cheapest and the premium-brand prices by analyzing the share of cheapest-brand price in premium-brand price. Basically, the larger the share of the cheapest-brand price in the premium-brand price, the smaller the gap, meaning fewer opportunities for substitution to cheaper brands. In 2014, the share of the cheapest-brand price in the premium-brand price in Turkey stood at a relatively low 55 percent, compared to 73 percent in other countries in the European Region. In practice, this means that in Turkey there is a relatively higher price difference between the cheapest brand cigarettes and the premium brand cigarettes for price-sensitive smokers. Availability of cheaper brands in the market undermines the fight against tobacco as it facilitates switching down by smokers to lower–price cigarettes. 15 Figure 9. Cigarette Price Dispersion in WHO EURO Countries The tobacco taxation structure is a key policy issue in the fight against SOURCE World Health Organization. tobacco, considering that there is evidence that complicated tax structures “WHO Report on the Global weaken the impact of taxes in reducing tobacco consumption in low- and Tobacco Epidemic, 2015: Raising Taxes on Tobacco.” middle-income countries (U.S. National Cancer Institute and World Health Geneva: WHO, 2015 Organization 2016). The tobacco industry’s pricing policy is based on undermining the effectiveness of tobacco taxes in order to increase the affordability of tobacco products, especially for youth, and to maximize the industry’s future sales. As described above, the tobacco tax scheme in Turkey includes an ad valorem tax (65.25 percent), VAT (15.25 percent), and a small specific excise tax (0.08 USD). Even though Turkey has one of the highest total tobacco tax burdens among WHO EURO countries, the specific excise tax rate is the third-lowest after Turkmenistan and San Marino, which do not have specific excise tobacco taxes. This type of tax scheme incentivizes firms to be flexible with prices, while also giving consumers the option to react to increased tobacco taxes by switching to lower-priced cigarettes. Firms’ and consumers’ response to tobacco tax policy can undermine the effectiveness of tobacco taxation in decreasing tobacco consumption. Therefore, an appropriate tax scheme requires a balance of ad valorem and specific tax rates to limit these effects (Atuk and Özmen 2016). 16 Tobacco Taxation in Turkey: An Overview of Policy Measures and Results SOURCE Figure 10. Type of Tobacco Taxes Used in WHO EURO Countries Authors calculations based on data from the Turkish Statistical Institute and the Tobacco and Alcohol Market Regulatory Authority 03.3 Income and Tobacco Consumption Besides relative prices, another important factor that would affect the demand for cigarettes is income. Turkey’s economy has been growing steadily since 2002. As a result of this rapid economic growth, per capita income increased by 66 percent in real terms between 2002 and 2015. One downside of economic growth is that the demand for cigarettes increases as the population becomes richer over time and has more resources to spend on cigarettes. One way to measure the change in affordability is to look at the percentage of per capita income needed to purchase 100 packs of cigarettes. Among upper and lower middle-income countries, the percentage of national income required to purchase 100 packs of cigarettes ranged from 0.5 to 31.8 percent (U.S. National Cancer Institute and WHO 2016). Among all middle-income countries, Turkey has one of the highest levels of cigarette affordability. Between 2000 and 2013, cigarettes became more affordable in 8 out 25 high- income countries and 15 out of 24 middle-income countries including Turkey. This change in affordability led to an increase in cigarette consumption for middle-income countries and a decrease for high-income countries. Figure 11 shows that a pack of cigarettes became significantly less affordable in Turkey between 2008 and 2010, mostly due to the global financial crisis. Affordability also declined slightly during the periods 2005-2006 and 2011- 2013. However, there has been a major increase in affordability since 2013. 17 Thus, 2.99 percent of per capita national income was needed to purchase 100 packs of cigarette in 2013; however, 2.56 percent of per capita national income sufficed to purchase 100 packs of cigarettes in 2015. Figure 11. Share of Per Capita Income Required to Buy 100 Packs Of Cigarettes in Turkey Another way to measure affordability is to develop an affordability index SOURCE Authors’ calculations based by dividing the average real prices of cigarettes by the real GDP per capita. on data from the Turkish The affordability index is set at 1 in the base year. If the affordability index Statistical Institute and the Tobacco and Alcohol Market is greater than 1 in following years, cigarettes have become less affordable Regulatory Authority. compared to the base year. However, an affordability index less than 1 indicates higher affordability. Figure 12. Affordability Index SOURCE Authors’ calculations based on data from the Turkish Statistical Institute and the Tobacco and Alcohol Market Regulatory Authority. 18 Tobacco Taxation in Turkey: An Overview of Policy Measures and Results Despite rising prices, cigarettes have become more affordable since 2003 as a result of Turkey’s fast-growing economy. Like the preceding affordability analysis, the affordability index reveals that cigarette affordability declined only in 2009, when Turkey’s economy contracted due to the global financial crisis. The increase in affordability of tobacco products helps explain the increase in cigarette sales in Turkey starting in 2013. Even though the price of cigarettes increased, higher per capita income weakened tobacco control efforts by increasing demand for cigarettes. Another factor that may have contributed to the recent increase in cigarette sales is the influx of Syrian refugees into Turkey, particularly since 2013. Tobacco use in Syria was extremely high before the crisis that began in 2011. An estimated 60 percent of Syrian men and 17 percent of women consumed cigarettes, and most of these were daily smokers. Around 20 percent of men were also intermittent users of water pipes (Ward 2006). In addition, tobacco usage is high among Syrian adolescents. Nearly 30 percent of Syrian boys and over 15 percent of girls between the ages of 13 and 15 were found to use tobacco products (Maziak et al. 2015). Currently, Turkey hosts more than 3 million Syrian refugees, equivalent to roughly 15 percent of Syria’s pre-conflict population. In addition, the war in Syria has made the smuggling of cheaper cigarettes into Turkey relatively easier as a consequence of weak border control between Syria and Turkey. 03.4 Government Revenue from Tobacco Taxes In 2015, Turkey collected 12.5 billion USD in tobacco tax revenues, accounting for 8.4 percent of all tax revenues. Between 2003 and 2015, per capita cigarette consumption decreased by 18 percent, while tobacco tax revenue increased by 476 percent. Compared to the 2003 tobacco excise tax revenue of 4.7 billion TL (3.1 billion USD), the 2015 tobacco excise tax revenue increased substantially to 27.0 billion TL (9.9 billion USD). The Turkish Government collected an additional 7.1 billion TL (2.6 billion USD) as VAT from cigarette sales. 19 Figure 13. Per Capita Cigarette Sales and Tobacco Tax Revenue Turkey doubled its total tax revenue in real terms after adjusting for inflation, SOURCE by increasing the excise tax rate. Tobacco taxes are a significant source of Authors’ calculations based on data from the revenue for Turkey. Ministry of Finance and the Tobacco and Alcohol Market Regulatory Authority. Table 5. Tobacco Tax Burden, Revenue, and Sales TOBACCO TAX BURDEN, REVENUE, AND SALES YEAR TOTAL TAX TOBACCO TAX REVENUE TOTAL SALES PER CAPITA BURDEN (BILLION TL) (BILLION STICKS) CONSUMPTION 2003 70.55% 6.58 108.16 1,619 2004 43.25% 8.36 108.87 1,611 2005 73.25% 9.62 106.72 1,559 2006 73.25% 11.71 107.91 1,557 2007 73.25% 12.65 107.45 1,532 2008 73.25% 14.19 107.86 1,518 2009 73.25% 15.22 107.55 1,493 2010 78.25% 19.11 93.35 1,276 2011 80.25% 20.28 91.22 1,229 2012 80.25% 25.48 99.26 1,320 SOURCE 2013 81.52% 27.20 91.66 1,205 Authors’ calculations based on data from the Ministry 2014 81.94% 29.26 94.68 1,231 of Finance and the Turkish 2015 82.37% 34.11 103.21 1,328 Statistical Institute. 20 Tobacco Taxation in Turkey: An Overview of Policy Measures and Results Since the beginning of the country’s Health Transformation Program in 2003, Turkey has successfully increased public health spending and collected more tobacco tax revenue. According to the latest available figures, in 2015, tobacco tax revenue was equivalent to 42 percent of the country’s public health expenditure and 1.5 percent of GDP. Figure 14. Tobacco Tax Revenue and Public Health Expenditure in Turkey 03.5 Illicit Tobacco Trade Fear of illicit tobacco trade has become an impediment to raising tobacco taxes worldwide, including in Turkey. The tobacco industry has seized this as an opportunity and attempts to convince policymakers that any tobacco tax increase will spark uncontrollable smuggling and ultimately result in lower government revenues. However, recent experiences in Canada and Sweden have disproven the industry’s claim that, if tobacco taxes are lowered, then tax revenues will increase. In the 1990s, under pressure from the tobacco industry, the Canadian and Swedish governments lowered tobacco taxes in an attempt to recover revenue losses caused by smuggling (U.S. National Cancer Institute 2016). However, one year after the introduction of these measures, tax revenues had fallen significantly, and cigarette consumption had increased. In Canada, it has now been shown conclusively that the tobacco industry itself was actively involved in facilitating much of the smuggling (Blecher and Walbeek 2004; Shafey 2009). 21 Illicit tobacco trade has many facets and is a multiplayer process, varying greatly in the commercial products involved and methods used. It negatively impacts countries in both economic and social terms. Smuggling crimes are committed either directly through border violations, or by irregularities or forgery during customs transactions. Some of the causes of the illicit tobacco trade include a lack of effective international cooperation, abuse of duty-free sales, and cross-border price differentials. Other contributing factors include lax law enforcement and insufficient penalties, transit system weaknesses, and information distribution networks. Finally, another major contributor is the lack of adequate resources to combat illicit practices. Although higher taxes give more incentives for illicit tobacco trade, maintaining stable taxes at a lower level due to fear of illicit trade does not solve the problem. Turkey is a good example of the feasibility of combatting the illicit tobacco trade, while successfully increasing tobacco taxes. Smuggled cigarettes, particularly brought in via Turkey’s eastern and southeastern borders, are distributed within Turkey and appear in trailer trucks with a fake seal and hidden in or under numerous kinds of goods. Since smuggled cigarettes is an important illicit trade activity, Turkey has expanded its control efforts against illicit tobacco trade. Adopting modern tools for tracking commercial products is part of the government’s strategy to more effectively tackle financial flows resulting from this illicit trade activity that benefit criminal enterprises. Table 6. Key Illicit Tobacco Trade Control Initiatives in Turkey Stamp-Applied Tracking System for Tobacco Products and Alcoholic Beverages initiated, July 2007 Tobacco product and alcoholic beverage sales without stamp banned, November 2007 2-Year action plan prepared to combat smuggling of tobacco and tobacco products, 2010 Enhanced border enforcement and spot checks, 2010 Increasing penalties to disrupt illicit trade, 2010 Protocol to Eliminate Illicit Trade in Tobacco Products signed by the Council of Ministers, 2014 The Ministry of Health, Ministry of Interior Affairs, Ministry of Customs and Trade, and Ministry of Finance have worked together to combat the illicit tobacco trade (Ministry of Interior and KOM 2016). In 2007, Turkey implemented a digital tax-stamp system using invisible ink and featuring a unique, covert code with product data for each cigarette pack. While the standard tax stamp provides only product security, the digital tax stamp helps with tax revenue planning, improves accounting control, and contributes to 22 Tobacco Taxation in Turkey: An Overview of Policy Measures and Results tobacco control policy, as well. The Ministry of Customs and Trade launched the online “Monitoring/Tracking System for Products with Tax Stamps” in 2007. This prevented products without tax stamps from remaining on the market. SOURCE Figure-15 Tobacco tracking and tracing system in Turkey Ministry of Finance In addition, the Ministry of Interior Affairs increased its efforts and capacity for enforcement. These efforts, along with enhanced coordination among Ministries, have resulted in success in the fight against the illicit tobacco trade, even as the government has raised tax rates and collected significantly more tobacco tax revenue. Thus, in 2009, 10.1 million packs of cigarette were seized in 2,700 cases as part of the fight against tobacco trafficking. However, by 2015, the numbers had risen to 143.4 million packs of smuggled cigarettes confiscated in 14,889 cases. The estimated tax loss resulting from seized smuggled cigarettes would have been approximately 800 million Turkish Lira, or 265 million USD; this is equivalent to 2.8 percent of tobacco tax revenues (Ministry of Interior and KOM 2016). Between 2005 and 2011, Turkey increased cigarette tax revenues by 124 percent, while the illicit tobacco market share ranged between 14.3 percent and 17.5 percent (U.S. National Cancer Institute and World Health Organization 2016). Between 2003 and 2009, the total tobacco tax burden in Turkey increased by 3.5 percentage points, from 70.6 percent to 74.1 percent, and the number of packs of cigarettes confiscated by the security forces increased by 6.5 million. Between 2010 and 2015, the total tax burden increased by a 23 similar increment, 3.4 percentage points, from 78.7 percent to 82.1 percent. However, during this period, the number of packs of cigarettes confiscated by security forces surged by almost 100 million, from 43.5 million to 143.1 million packs, due to increased efforts against illicit trade (Figure 16). The experience of Turkey’s shows that besides higher taxes on tobacco products, strengthened tax administration improvement efforts are required to realize the tobacco use reduction objective of this policy measure over the short and medium terms. From a health perspective, increased availability and affordability of untaxed and inexpensive cigarettes puts more people at risk of being harmed because of increased smoking, addiction to a deadly product, and the resulting ill health, premature mortality and disability associated with tobacco-related diseases. From a fiscal perspective, illicit tobacco trade only benefits a few (often criminal enterprises) at the cost of forgone tax revenues for the government, which results from taxes not being paid on tobacco products. Figure-16 Packs of cigarettes confiscated and total tax burden SOURCE in Turkey Ministry of Interior and KOM. “2015 Turkish Report of Anti- Smuggling and Organized Crime.” Ankara, 2016. 24 Tobacco Taxation in Turkey: An Overview of Policy Measures and Results 04. Lessons Learned Tobacco taxation is the most cost-effective way to fight against tobacco. It is possible to lower tobacco consumption and increase tobacco tax revenue by increasing tobacco taxes. Turkey’s government has increased tobacco taxes significantly since 2002. The total tax burden as a percentage of the retail price in Turkey reached 83 percent in 2017. As a result of the higher taxes, Turkey managed to double total tobacco tax revenue in real terms. In 2015, Turkey’s tobacco tax revenues were 82.13 billion TL (30.27 billion USD), and the share of tobacco tax revenues in total tax revenue was 8.4 percent. In addition, the percentage of the population who smoked in Turkey dropped from 31.2 percent in 2008 to 23.2 percent in 2012. The demand for tobacco products is sensitive to price changes. If tobacco taxes do not lead to higher tobacco prices, the impact of tobacco taxes on tobacco consumption is significantly diminished. Significant price increases through higher tobacco taxes discourage current tobacco users from continuing usage, prevent uptake of tobacco practices among potential consumers, and reduce consumption among current users. After a decline in total cigarette sales and per capita tobacco consumption between 2008 and 2013, both per capita tobacco consumption and total cigarette sales have begun to increase in Turkey. Average cigarette prices rose more slowly than the consumer price index between January 2013 and June 2016. Therefore, the demand for cigarettes increased. Turkey’s per capita cigarette consumption rate increased by 10 percent between 2013 and 2016. The demand for tobacco products is also sensitive to changes in income. The recent increase in cigarette sales can also be attributed to the increase in affordability of cigarettes in Turkey. Turkey’s economy has been growing steadily since 2002. As a result of rapid economic expansion, the demand for cigarettes increased, as the population became wealthier over time. In 2013, 2.99 percent of per capita national income was needed to purchase 100 packs of cigarettes. By 2015, however, 100 packs of cigarettes could be bought for only 2.56 percent of per capita national income. Higher tobacco taxes are only effective in reducing tobacco consumption if they result in lower affordability. While high tobacco taxes may create incentives for illicit tobacco trade, illegal trade activities can be controlled by strengthening the capacity of tax administration systems, focusing on both on legal means (e.g., use of prominent tax stamps, serial numbers, special package markings, health warning labels in local languages, adoption of uniform tax rates nationwide 25 that facilitate successful collection at the points of manufacture and import), and (ii) increased law enforcement (e.g., improving corporate auditing, better trace and tracking systems, and good governance). Turkey is a good example of the feasibility of combatting the illicit tobacco trade while successfully increasing tobacco taxes. Between 2005 and 2011, tobacco tax revenues increased by 124 percent, while the illicit tobacco market share ranged between 14.3 percent and 17.5 percent. Turkey stepped up its efforts against illicit trade by adopting digital tax stamps, which have effectively forced products without tax stamps out of the market. In addition, Turkey strengthened its efforts and capacity for enforcement. Enhanced coordination enabled major gains in the fight against the illicit tobacco trade, while still raising tax rates and tobacco tax revenue. In 2015 alone, 143.4 million packs of smuggled cigarettes were confiscated. The estimated tax loss resulting from seized smuggled cigarettes would have been approximately 800 million Turkish Lira or 265 million USD. Comprehensive, efficient national tobacco control activities require political commitment. In this regard, the Government of Turkey has been determined and successful in implementing tobacco control activities and fighting against the illicit tobacco trade over the past years. Ratification of the Protocol to Eliminate Illicit Trade in Tobacco Products, which is a supplementary treaty to the WHO Framework Convention on Tobacco Control (FCTC), is a critical first step for countries to confront this global health, economic and social scourge. The Protocol is now open for ratification, acceptance, approval, formal confirmation or accession by all Parties to the WHO FCTC to make this Protocol an international law. 26 Tobacco Taxation in Turkey: An Overview of Policy Measures and Results 05. References 1. Atuk, Oğuz, and M. Utku Özmen. 2016. “Firm Strategy and Consumer 14. Ministry of Interior, and KOM. 2016. “2015 Turkish Report of Anti- Behaviour under a Complex Tobacco Tax System: Implications for the Smuggling and Organized Crime.” Ankara. Effectiveness of Taxation on Tobacco Control.” Tobacco Control, May. doi:10.1136/tobaccocontrol-2015-052808. 15. Mollahaliloglu, Salih, Rekha Menon, and Iryna Postolovska. 2013. “Toward Universal Coverage : Turkey’s Green Card Program for the 2. Bilir, Nazmi, Banu Çakır, Elif Dağlı, Toker Ergüder, and Zeynep Poor.” 75012. The World Bank. Önder. 2009. “Tobacco control in Turkey.” Copenhagen: World Health Organization. 16. Önder, Zeynep, and Ayda A. Yürekli. 2014. “Who Pays the Most Cigarette Tax in Turkey.” Tobacco Control (September) doi:10.1136/ 3. Bilir, Nazmi, Hilal Ozcebe, Toker Erguder, and Kristina Mauer tobaccocontrol-2014-051639. Stender. 2012. “Tobacco Control in Turkey: Story of Commitment and Leadership.” WHO Regional Office for Europe. 17. Önder, Zeynep. 2002. “The Economics of Tobacco in Turkey.” World Bank Health Nutrition and Population (HNP) Discussion Paper/ 4. Blecher, EH, and CP van Walbeek. 2004. “An International Analysis of Economics of Tobacco Control Paper, No. 2. Washington, DC: World Cigarette Affordability.” Tobacco Control 13 (4): 339–46. doi:10.1136/ Bank. tc.2003.006726. 18. Shafey, O, M Eriksen, H Ross, and J Mackay. 2009. The Tobacco 5. Brock, Betsy, Barbara A. Schillo, and Molly Moilanen. 2015. Atlas. Third Edition. Atlanta, GA: American Cancer Society; Bookhouse “Tobacco Industry Marketing: An Analysis of Direct Mail Coupons Group. and Giveaways.” Tobacco Control 24 (5): 505–8. doi:10.1136/ tobaccocontrol-2014-051602. 19. Turkey Agricultural Engineering Association. 2016. “Tobacco Report.” http://www.tutuneksper.org.tr/tr/pdf/tutun-raporu-2016.pdf. 6. Chaloupka, FJ, KM Cummings, C Morley, and J Horan. 2002. “Tax, Price and Cigarette Smoking: Evidence from the Tobacco Documents 20. U.S. National Cancer Institute and World Health Organization. and Implications for Tobacco Company Marketing Strategies.” Tobacco 2016. The Economics of Tobacco and Tobacco Control. National Control 11 (Supplement 1): 62–72. doi:10.1136/tc.11.suppl_1.i62. Cancer Institute Tobacco Control Monograph 21. NIH Publication No. 16-CA-8029A. Bethesda, MD: U.S. Department of Health and Human 7. Chaloupka, Frank J, Ayda Yurekli, and Geoffrey T Fong. 2012. Services, National Institutes of Health, National Cancer Institute; and “Tobacco Taxes as a Tobacco Control Strategy.” Tobacco Control 21 (2): Geneva: World Health Organization. 172–80. doi:10.1136/tobaccocontrol-2011-050417. 21. Ward, K D. 2006. “The Tobacco Epidemic in Syria.” Tobacco Control 8. Feighery, Ellen C, Kurt M Ribisl, Nina C Schleicher, and Pamela I 15 (suppl_1): 24–29. doi:10.1136/tc.2005.014860. Clark. 2004. “Retailer Participation in Cigarette Company Incentive Programs Is Related to Increased Levels of Cigarette Advertising and 22. World Health Organization. 2015. “WHO Report on the Global Cheaper Cigarette Prices in Stores.” Preventive Medicine 38 (6): 876–84. Tobacco Epidemic, 2015: Raising Taxes on Tobacco.” Geneva: WHO. doi:10.1016/j.ypmed.2003.12.027. http://www.who.int/tobacco/global_report/2015/report/en/. 9. International Agency for Research on Cancer. 2011. “Effectiveness of 23. World Health Organization. 2015. WHO Framework Convention Tax and Price Policies for Tobacco Control.” WHO, Handbook of Cancer on Tobacco Control “The Protocol to Eliminate Illicit Trade in Tobacco Prevention, 14. http://www.iarc.fr/en/publications/pdfs-online/prev/ Products: an Overview.” Geneva: WHO. handbook14/. 24. World Health Organization. 2015. “Illegal trade of tobacco 10. Kose, Mehmet. 2016. The Ministry of Health of Turkey Health products: What you should know to stop it.” Geneva: WHO. Statistics Yearbook 2015. Edited by Berrak Basara, Cemil Guler, and Gokalp Yentur. Ankara: Ministry of Health. 25. Yürekli, Ayda , Zeynep Önder, Murat Elibol, Nejat Erk, Altan Cabuk, Mahir Fisunoglu, Sinan Fikret Erk, and Frank J. Chaloupka. 2010. 11. Kostova, Deliana, Jean Tesche, Anne-Marie Perucic, Ayda Yurekli, “The Economics of Tobacco and Tobacco Taxation In Turkey.” Paris: Samira Asma, and GATS Collaborative Group. 2014. “Exploring the International Union Against Tuberculosis and Lung Disease. Relationship between Cigarette Prices and Smoking among Adults: A Cross-Country Study of Low- and Middle-Income Nations.” Nicotine & Tobacco Research: Official Journal of the Society for Research on Nicotine and Tobacco 16 Suppl 1 (January): S10–15. doi:10.1093/ntr/ ntt170. 12. Marquez, P.V. 2015. “World No Tobacco Day 2015: On illicit trade and taxes.” The World Bank Group Blogs, May 29, 2015. Available at: http://blogs.worldbank.org/health/world-no-tobacco-day-2015-illicit- trade-and-taxes 13. Maziak, Wasim, Ziyad Ben Taleb, Raed Bahelah, Farahnaz Islam, Rana Jaber, Rehab Auf, and Ramzi G Salloum. 2015. “The Global Epidemiology of Waterpipe Smoking.” Tobacco Control 24 (Suppl 1): i3–12. doi:10.1136/tobaccocontrol-2014-051903. 27 28 29