The International Tax and Investment Center (ITIC), a non-profit research and education foundation with offices in Kiev, Moscow, London, and Washington, DC, recently published a study in conjunction with Oxford Economic Forecasting titled, "The Taxation of Cigarettes in Ukraine," according to a news report from the Ukraine Market Reform Group (UMRG) in Kyiv, Ukraine on May 14, 2003.

The Study strongly encourages the Ukrainian Ministry of Finance to retain the wholly specific excise tax regime for cigarettes that has been in placing and working with very high compliance rates and low levels of smuggling since 1996.

ITIC, who has conducted research on excises (on cigarettes, alcohol and petroleum products) in over 30 countries, and the IMF, believe that the current, wholly specific excise regime is the preferred method.

Their research has concluded:

· Specific taxes are easier to administer and improve tax collection;

· Excise tax revenues are higher when they come under a specific regime due to the inability of taxpayers to under declare the value or utilize transfer-pricing schemes;

· Tax revenues are more predictable under a specific tax regime. In particular, government revenues will not be affected if companies engage in "price wars."

ITIC reports that Russia adopted a mixed excise tax regime, effective 1 January 2003, similar to the NEW proposal that is being considered by the Ukrainian Ministry of Finance. Now many, including the IMF and the Russian Ministry of Taxes and Levies, are now believing this was a mistake that resulted from political pressures.

Although still preliminary, the excise tax revenues from cigarettes in the first quarter of 2003 are less than it otherwise would have been under a wholly specific tax. This revenue loss is attributed to companies legally adopting a complex transfer-pricing scheme (between manufacturing and trading companies) and under declaring values.

During the IMF's January Tax Policy Mission to Moscow they recommended to the Russian Ministry of Finance that, "The 5 percent ad valorem excise should be abolished in 2004." Further, the IMF stated about the ad valorem component of this new mixed system, "This is a meaningless element in the tobacco excise structure and a major additional burden on the excise tax administration compared to the previous situation in which the excise was exclusively specific." (Source: Russia: A Program of Tax Reform for the Near Future- IMF Mission Aide Memoire, January 28, 2003, page 50.)

ITIC is recommending that Ukraine not make the same mistake that Russia did, and retains the current excise tax regime for cigarettes and simply indexes the rate to increase budget revenues, according to the Ukraine Market Reform Group.