Revision of excise tax rates for tobacco products should be made based on the EU Directive provisions and the practise of EU Member States.

On March 18, 2024 the Government of Ukraine has registered in the Verkhovna Rada of Ukraine the Draft Law #11090 «On amendments to the Tax Code of Ukraine regarding revision of excise tax rates for tobacco products» (hereafter - Draft Law #11090) that was developed by the Ministry of Finance of Ukraine.

This Draft Law #11090 proposes the following:
- convert excise tax rates into EUR instead of UAH;
- reach the EU minimum excise level for cigarettes (EUR 90 per 1 000 cigarettes) by increasing gradually the specific excise tax rates till 2028;
- introduce special mechanism for currency exchange rate calculations for excise tax on tobacco products;
- implement excise tax difference for heated tobacco products (HTPs) comparing to cigarettes.

According to the estimations made by the Ministry of Finance of Ukraine, the adoption of Draft Law #11090 will result in increasing the additional budget revenues from the excise tax on tobacco products in the amount of around UAH 29 billion during 2025-2028 (in 2025 – UAH 0.6 billion, in 2026 – UAH 5 billion, in 2027 – UAH 9.4 billion, in 2028 – UAH 13.9 billion).

On June 4, 2024 the Draft Law #11090 was adopted by the Parliament of Ukraine as a basis in the first reading. This Draft Law is currently under consideration by the Committee on Finance, Tax and Customs Policy of the Verkhovna Rada of Ukraine and is being prepared for the second reading. In this regard, U.S.-Ukraine Business Council (USUBC) supports the Government's version of the Draft Law #11090 adopted in the first reading. At the same time, it is necessary to envisage the EU approach on determining the exchange rate of EUR by fixing it on October 1 st of the previous year for the whole next year. This provision will allow to plan business activities of tobacco enterprises - the largest taxpayers of Ukraine - as is insisting by both the Committee on Ukraine's Integration into the EU of the Verkhovna Rada of Ukraine and Governmental Office for the Coordination of European and Euro-Atlantic Integration. USUBC would like to emphasize that the initiatives of some Members of Parliament to change or edit the already adopted in the first reading decision bear significant risks for the state budget as they can provoke the galloping growth of illegal cigarette market in Ukraine which with extraordinary efforts is been trying to reduce for several months in a row by taking into account the recommendations of G7 countries and under the leadership of the Chairman of the Committee on Finance, Tax and Customs Policy of the Verkhovna Rada of Ukraine Danylo Hetmantsev.

The most crucial and risky initiatives are the following:
- to increase ad valorem excise tax rate for cigarettes from 12% to 25% and introduce it for HTPs. This proposal will lead to increase of illegal market and less predictability for budget revenues as well as common negative consequences on the whole legal tobacco market;
- to equalize excise tax rates for HTPs and cigarettes. Such initiative is not in line with the
EU approach and practice in the EU Member States;

- to implement state regulation for trade margin for retailers on the level of 15% for all
tobacco products and electronic cigarettes. This provision is conceptually repeating the
previous amendment to the Draft Law #1049 dated 29.08.2019 (Law #559-IX) that was vetoed by the President of Ukraine in 2020 with justification that such approach limits the rights of manufacturers or importers to set free prices for tobacco products and such provision does not correspond to the Constitution of Ukraine, the Economic Code of Ukraine and the Law of Ukraine "On Prices and Pricing".