This chapter finds that countries in Latin America and Caribbean (LAC) have gradually aligned their tobacco tax system with the best practices of the World Health Organisation (WHO). Nevertheless, there remains significant scope to further implement tobacco tax best practices across countries in the region that would strengthen the effectiveness of tobacco excise tax and other policies.
Tobacco Taxation in Latin America and the Caribbean
A Call for Tobacco Tax Reform
Abstract
The MPOWER policy package has successfully contributed to setting tobacco control reforms in motion. The MPOWER framework has been successful in evaluating country progress in the implementation of a broad set of tobacco control policies based on a few indicators, including the tobacco tax share (see Table 1.3 in Chapter 1).
However, the good performance with respect to the tobacco tax share target (i.e. the R component) is not a sufficient condition for a tobacco tax design and policy that is successful in reducing smoking prevalence (Drope, Siu and Chaloupka, 2022[1]). In countries where the tobacco tax share is substantial and at WHO best practice level, the tax share does not necessarily imply that cigarettes are expensive. While a high tax share can result in high prices, this is not necessarily the case when pre-tax prices are low (see Figure 1.13 in Chapter 1). Therefore, the tobacco tax share has to be evaluated jointly with the price level and the affordability of tobacco products.
As a response to the limitations of relying on a single indicator (i.e. the tobacco tax share), the cigarette tax scorecard was developed to capture the strengths and weaknesses of countries’ tobacco tax structures. The cigarette tax scorecard assesses countries’ cigarette tax systems with respect to their consistency with the four established best practices for cigarette taxation: 1) cigarette price of the most sold brand of cigarette, 2) changes in cigarette affordability, 3) tax shares (average between the proportion of total indirect taxes and excise tax in the retail price of the most sold brand of cigarette), 4) tax structure (i.e. design of excise taxes applied to cigarettes) (Chaloupka et al., 2020[2]; Chaloupka et al., 2021[3]; Drope et al., 2024[4]).
To evaluate a country’s tobacco tax policy, the OECD builds on the WHO’s existing tobacco tax policy best practices (BP) summarised in Box 4.1. It assesses the extent to which LAC countries have implemented some of the WHO tobacco tax policy best practices, following the same (criteria and colour-based) approach as MPOWER. The selected best practices all relate to core tobacco excise tax design and follow closely the topics discussed in Chapter 3. The evaluation criteria and the country information that is used to assess the implementation of tobacco tax best practices in countries in LAC are presented in Annex 4.A and Box 4.2. The summary scores for each country are included in Table 4.1.
The Framework presented in this report is a complement to the MPOWER framework and the cigarette tax scorecard that has as objective to identify opportunities for reform in individual countries. Rather than tracking reform progress over time, the aim of this report’s framework is to identify opportunities for country tobacco tax design and administrative reform.
BP1: Increase tobacco taxes significantly to reduce the affordability of tobacco products. To reduce affordability, tax increases need to result in nominal retail price increases that exceed the increase in nominal incomes (affordability).
BP2: Rely more on tobacco excise tax increases over other general indirect (and direct) taxes as they are most effective in raising both absolute and relative prices of tobacco products (type of taxes).
BP3: Rely more on specific tobacco taxes over ad valorem taxes, and in mixed tax structures, give more weight to the specific tax component than to the ad valorem tax component (tobacco excise tax structure).
BP4: Tax all traditional tobacco products (i.e. cigarettes, cigars, cigarillos, Roll-Your-Own (RYO) tobacco) with a tobacco excise tax (taxable products).
BP5: Tax new and emerging tobacco and nicotine products (i.e. electronic nicotine delivery systems (ENDS), electronic non-nicotine delivery systems (ENNDS) and heated tobacco products (HTP)) with an excise tax when their sales are not banned (taxable products).
BP6: For ad valorem tax structures, set the retail price as the tax base rather than, for instance, the cost, insurance and freight (CIF) value or the producer price (tobacco excise tax base).
BP7: For specific excise taxes, clearly define the tax base (for cigarettes, cigars and bidis, it is the number of sticks; for other tobacco products, such as smokeless tobacco or RYO tobacco, it is the weight of tobacco) (tobacco excise tax base).
BP8: Tax all tobacco and nicotine products similarly (e.g. similar tax structure, similar tax rates) (tobacco excise tax rates).
BP9: Rely more on uniform excise tax rates over tiered rates (tobacco excise tax rates).
BP10: Adjust specific tobacco taxes for inflation and real income growth on a regular basis (prices are not decreased at times of deflation) (indexation).
BP11: Complement the ad valorem excise tax with an excise tax floor (e.g. a minimum excise tax, a minimum retail price) (excise tax floors).
BP12: Implement non-tax policies affecting price levels of tobacco products (e.g. sale restriction for single stick of cigarettes, bans of promotional discounts for tobacco products, minimum number of cigarettes per pack) to support the effectiveness of tobacco tax policies (sale regulations that affect tobacco tax policy design).
Note: Some key sale regulations (BP12) have been included in the list of best practices on tobacco tax policy design because they closely interact with the other best practices, in particular those related to the tax base (BP6 and BP7). For instance, countries may have decided to comply strongly with BP6 and BP7 because they underperform on BP12. Strong compliance of BP12 might support high scores for BP6 and BP7.
Source: WHO technical manual on tobacco tax policy and administration (WHO, 2021[5]).
While significant country differences can be observed, many countries have implemented tobacco taxes that are completely or moderately aligned with a large selection of WHO best practices (Figure 4.1). A large majority of LAC countries (15 out of 18) have designed their tobacco tax regime such that it meets more than half of the WHO tobacco tax best practices either completely or moderately. Five out of 18 countries (Chile, Colombia, Ecuador, Mexico and Panama) meet 50% or more of the WHO best practices in a complete manner.
In some countries, however, the tobacco tax regime is only weakly aligned with WHO best practices. In four countries (Bolivia, the Dominican Republic, Guatemala and Honduras) the tobacco tax design meets less than 30% of the WHO best practices at complete level of implementation. Some LAC countries (Mexico, Peru and Uruguay) have a polarised tobacco tax policy design in that they completely meet a significant number of best practices but also fail to meet many of them.
Percentage of best practices, 2022
Note: WHO best practices in tobacco tax policy design are those listed in Box 4.1. For an explanation of the criteria used to classify each country’s compliance with the WHO best practices, see Box 4.2 and Annex Table 4.A.1.
Source: OECD based on WHO technical manual on tobacco tax policy and administration (WHO, 2021[5]); WHO report on the global tobacco epidemic (WHO, 2023[6]); and information listed in Chapter 3.
The OECD tobacco tax policy evaluation framework identifies the extent to which a country’s tobacco tax policy aligns with the WHO tobacco tax policy best practices. The framework follows a criteria and colour-based methodology that is aligned with the MPOWER framework. The overview of country alignment with the WHO best practices is presented in Figure 4.1. The detailed evaluation is included in Table 4.1. More detailed guidance on the methodology is included in Annex 4.A: Annex Table 4.A.1 presents the tax criteria used to assess the implementation of the WHO tobacco tax policy best practices; Annex Table 4.A.2 provides country information regarding the implementation of each best practice.
The evaluation of country tobacco tax policies based on the WHO best practices provides an objective basis that allows for country comparisons. Nevertheless, country specific settings may require policies that slightly deviate from these BPs. Hence, the evaluation framework is not meant to replace country specific tobacco tax policy analysis but has to be complemented with it.
Additional guidance with respect to the interpretation of some best practices (BP) is included below:
BP1 calls for ambitious tax reforms that reduce affordability and, therefore, induce behavioural change. If increases in tobacco tax rates are modest, they will have to be continued over several years in order to induce behavioural change. The criteria to assess compliance with BP1 are the trends in the tobacco tax share and the affordability of the most sold brand of cigarettes. The tobacco tax share corresponds to the share of total indirect taxes levied on a 20-cigarette pack (i.e., tobacco excise taxes, VAT, import duties, and any other indirect taxes). To assess whether affordability changed on average since 2012, the average annual percentage change in affordability is calculated as the least squares growth rate for each country with four or more years of data. The affordability of cigarettes is considered unchanged if the least squares trend in GDP per capita that is required to purchase 2 000 cigarettes (that is, 100 packs of 20 cigarettes) is not significant at the 5% level. Cigarettes are considered to have become less (more) affordable on average if the least squares trend in GDP per capita required to purchase 2 000 cigarettes is positive (negative) and significantly different from zero at the 5% level (WHO, 2023[6]).
BP2 states that tobacco excise taxes are more effective than other indirect taxes to raise absolute and relative tobacco prices. To assess the extent to which countries are compliant with BP2, the share of excise tax in the total tobacco tax mix is calculated. The tobacco tax mix expresses the share of all tobacco taxes as a percentage of the retail price of the most sold brand of cigarettes. Thresholds for BP2 have been set to allow classification in four categories that show the relative reliance on tobacco excise taxes: no reliance (0% of total tobacco tax mix), less reliance than on other indirect taxes (<50%); more than half but less than two thirds reliance on excise taxes (50%< reliance <66%); more than two thirds reliance on excise taxes (>66%).
BP3 signals that specific excise taxes are preferred over ad valorem tobacco taxes, as they are more effective in reducing tobacco consumption and raising tax revenues. The excise tax structure assessed in this chapter is that applied to cigarettes.
BP4 calls for the taxation of all traditional tobacco products (i.e. cigarettes, cigars, cigarillos and RYO tobacco) as they are equally harmful for health.
BP5: Following the WHO report on the global tobacco epidemic (WHO, 2021[7]), new tobacco and nicotine products include ENDS, ENNDS and HTP. In decision FCTC/COP8(22), Parties recognized those emerging products as tobacco products and were reminded to apply the measures agreed in the WHO Framework Convention on Tobacco Control (FTCT) (including Article 6 relative to taxation) in the same way as for conventional tobacco products.
BP7 signals that specific excise taxes should be levied on a legally defined tax base and that a “disaggregated” tax base (such as the use of single sticks of cigarettes) is preferred over a more aggregated tax base (e.g. kilograms, 1 000 sticks) especially for tobacco products that do not have standard packaging (e.g. cigars, RYO tobacco). The use of single sticks as the tax base prevents packaging strategies that aim at manipulating the tax base to reduce tax liabilities. Levying the specific excise tax per single stick is particularly critical in countries with no regulation regarding the minimum/maximum number of sticks per pack of tobacco products. Even in countries that forbid the sale of single stick cigarettes, single sticks can be used as the tax base.
BP10: Regular indexation could be annual when inflation is low, or more regular at times of high inflation.
BP12: The three key sale regulations that impact pricing behaviour considered in BP12 are sale restriction for single stick of cigarettes, bans of promotional discounts for tobacco products, and minimum number of cigarettes per pack.
Source: OECD.
Note: Cells with “…” mean data not reported/not available. Cells with “ – “ means the best practice does not apply because of the absence of specific or ad valorem excise tax. For an explanation of the criteria used to classify each country’s compliance with the WHO best practices, see Box 4.2 and Annex Table 4.A.1. The ad valorem tax base (BP6) for non-cigarette tobacco products in Mexico is the final (observed) retail price net of taxes (see Table 3.2 in Chapter 3 and Table 6.51 in Chapter 6). However, BP6 in Mexico is considered weak since the ad valorem tax base for cigarettes (i.e., the most popular tobacco product, see Table 6.49 in Chapter 6 and Figure 1.2 in Chapter 1) is the ex-factory price net of tax.
Source: OECD based on WHO technical manual on tobacco tax policy and administration (WHO, 2021[5]); WHO report on the global tobacco epidemic (WHO, 2023[6]); and information listed in Chapter 3.
The MPOWER R indicator is positively correlated with the implementation of the WHO best practices. Figure 4.2 indicates that LAC countries that perform better on the MPOWER R indicator also perform better on the broader set of WHO tobacco tax best practices, on average. This finding is supported by the tobacco tax literature that finds that well-designed tobacco taxes are effective in increasing the tax burden on tobacco products (Ngo et al., 2022[8]; Hutchinson et al., 2022[9]; Paraje et al., 2023[10]; Ghebreyesus and Clark, 2023[11]).
While the overall correlation is positive, there are large differences across countries. For instance, El Salvador meets more than 40% of the tobacco best practices completely but has a relatively low tax share compared to other countries that meet 40% of the best practices, such as Argentina, Brazil, Nicaragua and Peru. The Dominican Republic and Guatemala meet less than 20% of the tobacco tax best practices completely but have a tax share similar to the tax share in Costa Rica and Panama.
Complete WHO best practices as a share of total best practices and tobacco tax share as a percentage of the retail price of the most sold brand of cigarettes, 2022
Note: The percentage of complete WHO best practices is included in Figure 4.1. The R component tax share is the share of total tobacco taxes as a percentage of the retail price of the most sold brand of cigarettes (see Figure 1.12, Chapter 1).
Source: OECD based on WHO technical manual on tobacco tax policy and administration (WHO, 2021[5]); WHO report on the global tobacco epidemic (WHO, 2023[6]); and information listed in Chapter 3.
On average, LAC countries perform well with respect to a significant number of WHO tobacco tax best practices (Figure 4.3). The OECD tobacco tax policy evaluation framework identifies the best practices that are broadly followed or implemented in a more limited manner across countries. On average, LAC countries perform well with respect to:
BP2 (countries rely more on excise taxes than on other indirect taxes to raise the absolute and relative price of tobacco products)
BP3 (specific taxes are more common than ad valorem tobacco taxes)
BP4 (all traditional tobacco products are taxed)
BP7 (specific taxes are levied on a tax base per unit of tobacco product)
BP9 (uniform rates are more common than tiered rates)
BP12 (sale regulations are in place that support the effectiveness of tobacco taxes).
However, some best practices are implemented moderately or not at all (Figure 4.3). On average, LAC countries perform weakly with respect to:
BP1 (tobacco excise tax rates are set too low and the affordability of tobacco products increased overtime) (see Table 1.4 in Chapter 1)
BP5 (when their sales are allowed, new tobacco and nicotine products are often not taxed) (ECLAC, 2019[12])
BP6 (ad valorem tobacco taxes are levied on a narrow base)
BP8 (tax rates vary significantly across tobacco products, which runs the risk that consumers substitute one tobacco product for another, thereby undermining the overall effectiveness of tobacco tax policy)
BP10 (specific taxes are not regularly adjusted based on changes in the CPI and income growth to ensure tobacco products become less affordable over time)
BP11 (the absence of an excise tax floor in countries with an ad valorem tobacco tax).
The weak implementation of certain best practices can explain why, on average, cigarettes remain relatively affordable in countries in LAC (see Table 1.4 in Chapter 1). This is reflected in BP1 that shows that tobacco tax reform to reduce tobacco affordability remains a reform priority across countries in LAC (Figure 4.3).
The affordability of cigarettes is also explained by the fact that tobacco tax policy design is not sufficiently embedded within the broader functioning of the tobacco market. Market factors, such as the price level, the dispersion of prices across different brands, the purchasing power of smokers across the income distribution, and the industry’s strategic response to tobacco tax policy (both reforms and the absence thereof), also have an impact on a country’s performance with the R-component and the extent to which tobacco products are affordable (IARC, 2008[13]). On average in LAC, these factors are not sufficiently incorporated in tobacco tax policy evaluation and reform (see Chapter 5 for a detailed discussion).
Percentage of LAC countries, 2022
Note: The following countries are included: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru and Uruguay. For an explanation of the criteria used to classify each country’s compliance with the WHO best practices, see Box 4.2 and Annex Table 4.A.1.
Source: OECD based on WHO technical manual on tobacco tax policy and administration (WHO, 2021[5]); WHO report on the global tobacco epidemic (WHO, 2023[6]); and information listed in Chapter 3.
References
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Note: Data for all Best Practices (BPs) are for 2022. See Box 4.2 for further explanation on the indicators used to classify countries according to the criteria.
Source: OECD based on WHO technical manual on tobacco tax policy and administration (WHO, 2021[5]); WHO report on the global tobacco epidemic (WHO, 2023[6]); and information listed in Chapter 3.
Note: Cells with “N/A” means the BP does not apply for the corresponding country because of the absence of specific or ad valorem excise tax. BP1 is assessed for the 2012 – 2022 period. The excise tax share indicator (BP2 and BP3) corresponds to the share of excise tax in the tobacco tax mix, which is defined as the sum of all tobacco taxes expressed as a percentage of the retail price of the most sold brand of cigarettes. For more detailed information on excise tax rates across tobacco products (BP8), see Table 3.2 and Annex 3.B in Chapter 3. Tax bases and tax rates (BP6 – BP9) correspond to the design of excise taxes levied on all tobacco products. Countries can levy the specific excise tax per stick of cigarettes, and per kilogram or gram for other tobacco products (e.g. Colombia, Nicaragua). Ad-valorem tax base “EFP” means “Ex-factory price/CIF value”; “SRP” means “Suggested retail price by the manufacturer/importer”; “FRP” means “Final (observed) retail price”; “CPI” means consumer price index. The ad valorem tax base (BP6) for non-cigarette tobacco products in Mexico is the final (observed) retail price net of taxes (see Table 3.2 in Chapter 3 and Table 6.51 in Chapter 6). However, BP6 in Mexico is considered weak since the ad valorem tax base for cigarettes (i.e, the most popular tobacco product, see Table 6.49 in Chapter 6 and Figure 1.2 in Chapter 1) is the ex-factory price net of tax.
Source: OECD based on WHO technical manual on tobacco tax policy and administration (WHO, 2021[5]); and information listed in Chapter 3.