HTP Tax Gap: Methodology | Campaign for Tobacco-Free Kids
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Methodology

 

Prices of tobacco products  

For all countries, prices of heated tobacco products (HTPs) are based on the most sold brand of heated cigarettes in the country. Conventional cigarette brands are selected based on their compatibility to selected heated cigarettes. Since their introduction in 2014, Phillip Morris International Inc. (PMI) has remained the primary provider of HTPs in most countries price data, with its most sold product IQOS’ HEETS. PMI reports that HEETS heated cigarettes are most comparable to the conventional cigarette brand Marlboro. For a majority of countries shown in the maps, PMI publishes prices for packs of 20 HEETS and of 20 sticks of Marlboro in countries where the products are sold, and a on a regular basis (PMI Investor Relations.)

In some countries, we use alternative, official sources for prices (see “Special cases” section below.) For example, in Canada, Marlboro are not widely sold so PMI reports that the conventional cigarette brand most comparable to HEETS is Belmont, and therefore lists Belmont prices rather than Marlboro. 

In some countries The Law requires companies to publish their retail prices, or other price bases used for the ad-valorem excise. For example in Hungary, prices of all tobacco products are published by the National Tax and Customs Administration (NAV).  

In all cases, prices and taxes are as of October 2020. 

 Excise taxes 

Excise tax rates and systems are obtained from official sources, provided and described in each country description (available in the sidebar on the right-hand side of this page.) As of October 2020, most countries taxed heated tobacco as a separate category included in the tax code, or based on other existing categories such as “other tobacco products”, or “smokeless tobacco”. In the majority of countries, heated tobacco is taxed under s specific tax system based in the weight of tobacco or “tobacco mixture”, implying a much lower tax rate for heated tobacco than for conventional cigarettes.  

Eight countries1 we have analyzed use a mixed tax system for heated tobacco, including both a specific tax based on weight and ad-valorem tax based on the TIRSP (the tax-inclusive retail sales price). Many of these countries also impose a minimum excise on heated tobacco.2 Two countries use a pure ad-valorem system based on the TIRSP to tax heated tobacco.3 As of Oct 2020, only 12 countries4 of the 65 countries, jurisdictions, and provinces presented in the maps use a specific tax system with the same tax base as that of cigarettes—the number of sticks—either applying the same tax rates for both products or a much lower tax rate on heated tobacco than on cigarettes. 

To convert excise taxes on heated tobacco from weight to sticks, we use an equivalency rate of 0.305 grams of tobacco per heated cigarette, as reported for HEETS by PMI, and found to be the equivalency rate in most countries that sell HEETS. 

For cigarettes and heated tobacco products, the total amount of excise tax on a pack of 20 sticks calculated as:

Total excise tax = maximum (specific excise + ad-valorem excise; minimum excise) (1)

Where the specific excise (or the minimum excise) for heated tobacco in countries that use a specific excise based on weight is calculated proportionately to the weight of tobacco contained in a  pack of 20 heated cigarettes (20 sticks of 0.301 grams each): 5

Specific excise amount = excise tax amount per gram x 6.1 (2)

The ad-valorem excise is calculated as:

Ad valorem excise amount = tax rate (%) x tax base (3)

Where the definition of the tax base varies across countries. For example, in most European countries the tax base is the retail sales price inclusive of all taxes (also defined as the WASP or TIRSP depending on countries). However, many other countries use a different tax base for the ad-valorem tax on cigarettes.6 

Excise tax burden

The Excise tax burden is the ratio of the excise tax value to the retail selling price inclusive of tax, expressed in percent as:

Excise tax burden = excise tax amount / price (4)

 Excise gap 

The excise gap is the simple difference in the excise tax burden of cigarettes and heated tobacco, expressed in percent as:

Excise tax gap = excise tax burdencigarettes– excise tax burdenheated tobacco (5)

Special Cases 

Azerbaijan

Currently, Phillip Morris International does not sell heated tobacco in Azerbaijan. Instead, we use “Kent Neosticks”, produced by British Tobacco International (BAT) for use with their HTP “glo,” obtained directly from exchanges with the World Heath Organization (WHO). The price of a pack of Neosticks was AZN 39 Manat in October 2020. For cigarettes, we use the brand Kent that is most comparable to Kent Neosticks, obtained in September 2020 from local media sources.

Canada
PMI provides prices for heated tobacco and cigarettes only in the province of Ontario. Also, contrary to other countries, the conventional cigarette brand that PMI reports as the most comparable to HEETS sticks is “Belmont.” Also, as packs are sold in various pack sizes (e.g., packs of 25 sticks for Belmont), they are converted here into packs of 20 sticks. For other provinces we predict the price of heated tobacco and the Belmont brand. To do this we start from PMI reported prices in Ontario, and subtract all statutory excise and sales taxes, provincial and federal, to obtain the “net-of-tax” price in the province. We then subtract the production cost of heated tobacco or cigarettes to obtain the retail margin.

pricei = excisefederal + excisei + costproduct + retmargin + sales_taxesi (6)

Where:

pricei = price of product in province i (in CAD),

excisefederal = federal excise tax (in CAD),

excisei = province i′s excise tax (in CAD),

costproduct = cost of production (in CAD),

retmargin = retail margin (in CAD),

sales_taxesi = sales taxes in province i (in CAD).

Sales taxes represents the harmonized sales tax (HST), which combines provincial, general, and other sales taxes (GST, PST, QST).
Equation (6) can be transformed as:

pricei = [(excisefederal + excisei + costproduct)∗(1 + rmargin)]∗(1 + rsales tax, i) (7)

Where:

rmargin = retail margin rate (in %), and
rsales tax, i = sales taxes in province i (in %).

We use a production cost of 20 sticks equal to CAD 3.5 for both cigarettes and heated cigarettes.7
For the state of Ontario, in equation (7) above, we observe the price, all excises and sales taxes. We obtain the retail margin as follows:

rmargin = [pricei / (1+ rsales tax, i)] x [1 / (excisefederal + excisei + costproduct)] −1 (8)

In Ontario in October 2020, the price of 20 cigarette sticks (Belmont) was CAD 14.3 and that of 20 HEETS was CAD 7.95. The federal excise was equivalent to CAD 2.48 for a pack of 20 sticks of cigarettes and CAD 0.16 per gram of heated tobacco (equivalent to CAD 0.948 for 20 HEETS). The provincial excise was CAD 3.695 for 20 sticks of cigarettes, and CAD 0.185 per gram of tobacco (equivalent to CAD 1.127 per 20 HEETS). The harmonized sales tax was 13%. Using equation (8), the resulting retail margin was about 31% for cigarettes and 26% for heated tobacco. To compute the retail price in other provinces, we apply the same retail margin / production costs as found in Ontario, and each provinces’ statutory sales and excise taxes (federal and provincial).  

Colombia
For Columbia, where heated tobacco sticks and cigarette sticks are taxed under a mixed excise system, the tax base for the ad-valorem is the “certified price”, published annually by the DANE. For more information, see the Colombia country page.

Hungary
In Hungary the Law requires companies to submit retail prices of all tobacco products to the National Tax and Customs Administration (NAV). The maps use prices of PMI’s Marlboro cigarettes and HEETS Amber published in the third quarter of 2020. 

Source

Indonesia

We obtained retail sales prices and banderole prices of HEETS from exchanges with the World Health Organization (WHO).

As explained here, the excise tax on heated tobacco is 57% of the banderole price. For HEETS, as of 2020, the banderole price was IDR 1350 per stick, and the retail price was IDR 1725 per stick. This implies a retail margin of:

Retail marginHEETS = (retail priceHEETS – banderole priceHEETS) / banderole priceHEETS = 27.8%  (9)

Therefore the tax burden on HEETS, or effective ad-valorem tax rate (that is tax rate as a percentage of the retail price) is:

Effective tax rateHEETS = 57% x [retail marginHEETS / (1 + retail marginHEETS)]  = 44.61%  (10)

This implies an excise tax amount of IDR 602.2 per stick of HEETS. 

For cigarettes, we obtain retail prices for the brand Marlboro from unofficial exchanges with the Customs of Indonesia. As explained here, the excise tax system for cigarettes consists of a specific excise based on sticks and a maximum ad-valorem of 57% of the HJE. 

Maximum excisemarlboro = 57% x HJEmarlboro (11)

In 2020, the HJE for SPM, tier I, was IDR 1790 per sticks, implying a maximum excise of IDR 798.5 per conventional cigarette stick.

Israel
As explained here, Israel applies a mixed excise tax system that includes a minimum excise, with the same rates on cigarettes and heated tobacco. The tax base for the ad-valorem is the wholesale price before excise taxes. To obtain the tax base, we use a report published periodically by the Ministry of Health’ “Health Report on Smoking in Israel.” We obtained the wholesale price (the price before all taxes and sales' margins) from large companies’ (including PMI) price data released by the Knesset.

Sources 

Italy

As explained here, Italy applies a specific excise on heated tobacco based on a complex methodology that compares heated tobacco brands with “equivalent” quantities of comparable cigarettes. The government calculates and provides a list of prices and their composition for every brands of heat sticks sold on the market and updates this list regularly. For the maps, for we use the listed price for PMI’s HEETS Amber brand. 

For the tax on cigarettes, we calculate the total excise using the price of the Marlboro brand, and apply the formula presented in equation (1). Sources are also available on Italy's country page.

Japan

As explained here, since the 2018 tax reform, Japan applies a specific excise on heated tobacco based on a complex methodology that compares heated tobacco brands with “equivalent” quantities of comparable cigarettes. The government provides the detailed formula and how it changes every year until the 2022 fiscal year. For the maps, we apply the formula for FY 2020/21, starting Oct 1, 2020.

The formula to convert a pack of heated tobacco sticks into an equivalent pack of cigarettes is defined by the National Tax Administration (NTA) as follows:

NsticksHTP = [wHTP x r1] + [(wHTP / 0.4) x 0.5 x r2] + [(priceHTP / AvPricecig) x 0.5 x 0.2] (12)

Where:

NsticksHTP = Converted value to the number of conventional cigarettes in a pack of heated tobacco;

wHTP weight pack of heated tobacco (including the weight of rolling paper, filters etc.);

 r1 = this is a weight that decreases by 0.2 points every fiscal year from 0.8 in year 1 (FY starting Oct 1, 2018) to 0 in year 5 (FY starting Oct 1, 2022);

r2 = this is a weight that increases by 0.2 points every fiscal year from 0.2 in year 1 (FY starting Oct 1, 2018) to 1 in year 5 (FY starting Oct 1, 2022);

priceHTP = Retail price per pack of heated tobacco (excluding consumption tax); 

AvPricecig = Average retail price per conventional cigarette. It is the total amount of tax and special tobacco surtax multiplied by 60/100.

As of October 2018, the price per pack of 20 heated cigarettes was JPY 500, the tax on 1000 cigarettes was JPY 13,244. The NTA provides the list of converted number, including HEETS into equivalent cigarettes () as 15. Therefore, the estimated weight value of is 9.252 grams.

The resulting tax amount per 1000 heat sticks in FY 2018/19 was:

Excise tax (FY2018-19)HTP = (15/20) x 13,244 = JPY 9,933

Imputing the price of heated cigarettes, the total tax amount per cigarettes, and the remaining parameters into Equation (7), we can infer the implied converted number of a pack of 20 heated cigarettes for fiscal year starting Oct 1, 2020,

NsticksHTP = (8.363 x 0.4) + [(8.636 / 0.4) x 0.5 x 0.6] + [(550 / (14.244x0.6)) x 0.5 x 0.2] = 16.6

This is equivalent to the conversion number posted by the NTA for years 2020 as follows (2nd year of Reiwa). The resulting excise amount per 1000 sticks of heating tobacco is:

Excise tax (FY2018-19)HTP = (16.6/20) x 14,244 = JPY 11,828

Sources

United Arab Emirates

As explained here, the tax on all tobacco products, including cigarettes, heated tobacco, electronic cigarettes (e-liquids with or without nicotine) and all other tobacco products is 100% of the “excise price”.

We follow the Excise Law Decree to compute the excise price as a percentage of the “designated retail price”. The percentage is 50% (“half of the excise rate on the excise price”). The “designated retail price” is defined by the law as the applicable retail selling price after deducting the Value Added Tax.

As of 2020, the VAT (before tax) is 5%. Therefore, for any tobacco product, the excise tax is calculated as:

Excise taxi = 0.5 x Retail Sales Pricei x (1 – 0.05). (13)

Where i refers to any tobacco product.


1. Belgium, Finland, France, Georgia, Germany, Luxembourg, Poland, and Portugal. 

2. For example in Luxembourg and Portugal apply a minimum excise on the “other tobacco category”, which is the category in which heated tobacco is taxed by default.

3. Dominican Republic and Switzerland. 

4. Armenia, Columbia, Georgia, Hungary, Israel, Italy, Japan, Jordan, Moldova, Philippines, South Africa, and South Korea. Since January 2021, heated tobacco products in Ukraine are also taxed based on the number of sticks.

5. See notes for exceptions in the conversion rate for specific excise taxes (e.g., Costa Rica).

6. See notes for exceptions in the tax base for ad-valorem taxes (e.g., Costa Rica).

7. Physicians for s Smoke Free Canada use a production cost of CAD 3.5 per 20 sticks of conventional cigarettes and CAD 4.3 for 20 heated cigarettes. Note that our assumption that the production cost of HEETS is the same as that of cigarettes does not affect the results since in our calculations, any change in the production cost results in a proportional change in the retail margin.

Related Resources
Country-Specific Data

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