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Tax Gap of Heated Tobacco Products in Japan

PMI launched IQOS in Japan in 2014, the first country in the world in which IQOS was available. Until 2017, “heat-not-burn” tobacco was automatically classified as "pipe tobacco" under the Tobacco Tax Law, subject to a far lower tax rate than cigarettes. However, with the 2018 tax reform, a new category of "heat-not-burn tobacco" has been established.

Under the new system, effective October 1, 2018, heated cigarettes are progressively taxed at the same rate as an equivalent number of conventional cigarettes. The formula to determine equivalent quantities of heated cigarettes and conventional cigarettes is similar to a mixed excise system, in that it takes both quantities of tobacco and the retail price into account. However, the tax system changes every year in order to transition to a pure specific excise by the fiscal year starting October 1, 2022. For fiscal year starting Oct 2020 (FY2020/21), we find that the equivalent quantity of heated cigarettes per pack is 16 for PMIs HEETS brand, yielding an excise tax per pack of JPY 10,683 per 1000 heat sticks (in effect, 75% of the excise tax on cigarettes). Depending on heated tobacco prices trends, it is forecasted to increase to about 85% of the excise tax on cigarettes by FY 2022/23. See the Methodology for more information.

Cigarettes in Japan are subject to several specific excise taxes at the national and local levels, which added up to YEN 14,244 on October 1, 2020, and are scheduled to increase to YEN 15,244 on October 1, 2021.

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Last Updated Feb. 22, 2021