IME with e new report on the excise framework for the new non-combustible products in Bulgaria

See the full report: EU excise framework for the new non-combustible products and applications for their taxation in Bulgaria (IME, 2023)

In recent years IME in partnership with The European House-Ambrosetti has conducted an in-depth study of the commercialization and excise treatment of heated tobacco products (HTPs) in Europe. IME report examines the differential tax treatment of HTPs, as part of the broader discussion on the taxation of non-combustible products and the upcoming revision of Directive 2011/64/EU on the structure and rates of excise duty applied to manufactured tobacco. In 2023 IME presents a new version of the report, which is adapted for the Bulgarian context and provides guidelines for the excise treatment of non-combustible products in Bulgaria.

At the end of 2022, amendments to the Excise Duties and Tax Warehouses Act were adopted, establishing a new excise calendar for the 2023-2026 period – setting forth stepped increases of all tobacco excise duties and introducing excise duties on the nicotine-containing e-liquids. In 2023, additional changes were enacted that 1) taxed all e-liquids with equal excise regardless of whether they contained nicotine or not and 2) introduced a new excise duty for nicotine-containing tobacco substitutes, such as the so-called nicotine pouches. Currently, the excise calendar states that in the next four years, excise duties on all tobacco and nicotine products in Bulgaria will increase, with the category of “non-combustible products” causing particular interest, as it is constantly changing.

Bulgaria follows the general trends in the taxation of new non-combustible products and specifically of HTPs in Europe. The framework for the HTPs sets a separate excise category and purely specific excise duty, based on tobacco weight in the products. The excise burden on HTPs in Bulgaria however is relatively high, as there is essentially no excise differentiation with cigarettes when the excise burden is calculated based on the tobacco weight in the product. The excise burden on HTPs in the EU is usually in the order of 50% to 90% of that on cigarettes, calculated on the basis of the weight of tobacco in the product. Such a difference is crucial for the realization of HTPs and for encouraging manufacturers to direct their investments to new products.

With the excise calendar until 2026 and the steeper increase of the excise on HTPs, Bulgaria will become one of the few EU countries where the excise on HTPs will be higher than that on cigarettes calculated based on tobacco weight in both products. Taking into account the new excise rates on e-liquids, regardless if they contain nicotine or not, as well as the new excise duty on nicotine-containing tobacco substitutes, one can claim that Bulgaria will be among the countries with a relatively wide scope of excise taxation on tobacco and nicotine products, but also with a relatively high excise burden on the category of non-combustible products compared to the excise burden on combustible tobacco products.

While many of Europe’s leading markets for non-combustible products are increasing the excise duty on new products and narrowing the excise differentiation vis-à-vis cigarettes, almost all retain a favourable framework, incl. such specifically for HTPs. Favourable excise treatment gives companies a strong incentive to invest in the development of new products. At the same time, against the background of an upcoming increase in excise taxes on cigarettes, as well as wider taxation of all products on the general nicotine market, a steady increase in revenues from taxation of tobacco and nicotine products in Bulgaria can be expected. This allows for a more balanced approach towards new non-combustible products that will ensure both tax revenue and a good environment for their development.