# Presentation: 020368

## Taxed to Death

- How Import Tariffs and Taxes Restrict Access to Essential Medicines
- Presentation to the President’s Advisory Council on HIV AIDS, 20th June 2005
- Roger Bate, Resident Fellow American Enterprise Institute and Co-Director of Africa Fighting Malaria,  _[rbate@aei.org](mailto:rbate@aei.org)_, 202-828-6029

**Notes:**
Thank you for inviting me to speak with you today on this extremely important topic of access to essential medicines, and one means by which access is prevented, the imposition of taxes and tariffs on medicines and medical devices in many countries of the world.

## More than 1/3rd of world’s population lacks access to essential medicines
Millions die every year of preventable and curable diseases
Many reasons for lack of access
		Poverty
		Lack of infrastructure
		Lack of political will
Many countries impose burdensome import tariffs and sales taxes
State imposed barriers to access can and must be removed immediately		

- Millions die every year of preventable and curable diseases
- Many reasons for lack of access
- 		Poverty
- 		Lack of infrastructure
- 		Lack of political will
- Many countries impose burdensome import tariffs and sales taxes
- State imposed barriers to access can and must be removed immediately

- Access to Medicines

**Notes:**
Few people in the poorest parts of the world have ready access to good medical supplies. In some countries coverage is quite good in others it is disastrously low. The lack of access costs lives, millions of them. The critical reasons for lack of access are probably poverty and lack of infrastructure, but lack of political will is also an important factor (and something that can be changed almost over night). It is the sovereign right of any nation to raise revenue as it sees fit, however when many people in these nations do not have access to the most basic life-saving interventions it does seem odd to slap tariffs on the entry of these products and tax them – perhaps the most regressive form of taxation there is, hurting the sickest, often poorest people in the land. It is my opinion, and that of the 14 NGOs from 10 countries so far signed up in our initiative, that these regressive policies be repealed instantly.

## Looks at levels of import tariffs for Essential Drugs List
Chapter 29 (active ingredients) and Chapter 30 (completed pharmaceuticals, plus bandages, wadding, swabs etc)
53 Countries examined for which reliable data  could be obtained;
Average of import tariffs for Ch. 29 and Ch. 30 plus other duties & VAT gives overall state-imposed price hike

- Chapter 29 (active ingredients) and Chapter 30 (completed pharmaceuticals, plus bandages, wadding, swabs etc)
- 53 Countries examined for which reliable data  could be obtained;
- Average of import tariffs for Ch. 29 and Ch. 30 plus other duties & VAT gives overall state-imposed price hike

- Working Paper

**Notes:**
Our working paper (and its very much a paper that is being updated as new data/evidence arises) looks at essential drug access as defined by WHO. The list we had to work from was fairly old in order to compare with the available and consistent tariff and tax data. We looked at various product categories and settled on chapter 29 and chapter 30 categories of the harmonized system. We found partial data for most countries but only reliable data for 53.   We simply averaged the various category weightings to come up with a single figure (some country data was quite disaggregated others were not, so we stuck with the best average we could come up with). Incidentally, we were contacted by Richard Laing, an economist at the WHO, who is working on a similar paper, and we are discussing various methodologies for improving measurement/aggregation. The Laing/WHO paper will be out after WHA – posted to an intellectual property web site -  CIPIH I think.
 Ok so what did we find

## Slide 4

| Country | Access to essential medicines (%) '99 | Tariff | VAT |           Combined tariff |
| --- | --- | --- | --- | --- |
| Kenya | 36 | 22 | 16 | 38 |
| Morocco | 66 | 18.5 | 19 | 37.5 |
| Tanzania | 66 | 16.2 | 20 | 36.2 |
| Uganda (EACU) | 70 | 10 | 21 | 31 |
|  |  |  |  |  |
| Peru (AC) | 60 | 10 | 19 | 29 |
| Nigeria | 10 | 20 | 8 | 28 |
| Brazil | 40 | 9.6 | 18 | 27.6 |
| Pakistan | 65 | 12 | 15 | 27 |
| Colombia (AC) | 88 | 10 | 16 | 26 |
| Bolivia (AC) | 70 | 12 | 13 | 25 |
| India | 35 | 16 | 4 | 20 |

**Notes:**
Many of the poorest African nations impose substantial tariffs and taxes on medical products. As will become clear shortly, note the tariff rates more than the taxes – taxes are regressive, but it’s the tariff numbers that are more important in denying access. Note especially Nigeria and India – countries with large populations, low access and significant tariffs

## Tariff peaks  
Morocco 46% tariff on bandages and gauze with pharmaceutical substances (300590)
DR Congo, 18.5% on wide range of medicines, including some ARVs

Duties
Kenya imposes number of other duties, inspection fees of 11.75% 

VAT and sales Taxes
India – great confusion as VAT recently lowered to 4%, but many states still charging VAT plus old sales taxes.  Import tariffs lowered to 15%

Overall, many countries inflate the price of medicines and essential medical inputs by up to 40%.

- Morocco 46% tariff on bandages and gauze with pharmaceutical substances (300590)
- DR Congo, 18.5% on wide range of medicines, including some ARVs
- _Duties_
- Kenya imposes number of other duties, inspection fees of 11.75%
- _VAT and sales Taxes_
- India – great confusion as VAT recently lowered to 4%, but many states still charging VAT plus old sales taxes.  Import tariffs lowered to 15%
*Overall, many countries inflate the price of medicines and essential medical inputs by up to 40%.*

- Results

**Notes:**
There are some highlights- or should that be lowlights. Note Morocco (this is a sub-category of chapter 30 medical products) , DR Congo and Kenya – Eastern African Customs Union recently imposed a 10% tariff, although I am informed that Kenya has repealed this – no one at the Embassy could confirm this. The new more market orientated Indian Government lowered taxes and tariffs from a combined amount of 61%, to about 20% although there is some disagreement as to how much the new policy is being implemented at the state level. 

## Southern African Customs Union – 0% tariff on Chapter 30 items (but Lesotho imposes 10% ‘withholding’ tax)
22 Countries (US, EU, Canada, Switzerland, Japan, Norway, Czech Rep, Slovak Rep, Macau China) have 0% tariffs as part of Pharmaceutical Agreement of WTO Uruguay Round
Brunei has 0% tariffs and 0% other taxes
Costa Rica, El Salvador, Honduras – all very low import tariffs on average
Many countries exempt ARVs from tariff – but data poor 

People die of many diseases in poor countries, not just HIV/AIDS.  If ARVs exempt, why not everything else?

- 22 Countries (US, EU, Canada, Switzerland, Japan, Norway, Czech Rep, Slovak Rep, Macau China) have 0% tariffs as part of Pharmaceutical Agreement of WTO Uruguay Round
- Brunei has 0% tariffs and 0% other taxes
- Costa Rica, El Salvador, Honduras – all very low import tariffs on average
- Many countries exempt ARVs from tariff – but data poor
*People die of many diseases in poor countries, not just HIV/AIDS.  If ARVs exempt, why not everything else?*

- Zero Tariff Countries

**Notes:**
Much like the 22 countries party to the pharma agreement of the GATT Uruguay round, the Southern African Customs Union imposes no tariffs on finished medicines, in fact all chapter 30 items. Many countries have low tariffs, although any tariffs probably increase the possibility for corruption given the way that tariff payments are sometimes made. Also, ARVs for HIV patients are often exempted – I am compiling a list, BUT even so drugs for opportunistic infections are often not included in such exemptions, and neither are anti-malaria, or anti-TB treatments which are often deadly companion diseases to those with HIV.  But the fact that pressure on them has exempted products shows that it can be done. Further exemptions should be encouraged
 It is important to note that the funding raised from tariffs and taxes on medical products is not, generally speaking, spent on health care. And even if it was its not the most effective method to raise funds anyway.

## Regression analysis shows 1% decrease in import tariffs could increase access by 0.98% (1% significant level)
Sales Taxes less repressive to access than tariffs
Why?  Perhaps taxes paid by general population, less scope for corruption, unlike import tariffs
Tariffs could indicate more closed, less free economy.  Therefore greater poverty and lower access				

- Sales Taxes less repressive to access than tariffs
- Why?  Perhaps taxes paid by general population, less scope for corruption, unlike import tariffs
- Tariffs could indicate more closed, less free economy.  Therefore greater poverty and lower access

- How do Tariffs Affect Access?

**Notes:**

Our econometric analysis found that income level was the most significant positively correlated variable determining access to drugs, wealthier countries have far greater access than poorer ones.  However, tariff rates are also highly statistically significant as a negative determinant of access – countries with higher tariffs on average have lower access. The key finding was that a 1% lowering of tariffs could lead to an increase in access of 1%. Recall that Nigeria had a 20% tariff rate a 10% access rate (India was 16% tariff and 35% access). These countries are highly populous and if this equation and relationship are causal, as we suspect, then scrapping these tariffs would increase access for millions of people. 
Sales taxes are negatively correlated with access, much like tariffs, but the relationship is not statistically significant. This is probably because tax rates are collected by the national treasury and payment of taxes is collected broadly across an economy, whereas tariffs are indicative of more closed, less capitalistic, less free economies (and hence less wealthy), but also because the way that tariffs are often collected, ships docking and charges collected, which allows for some level of corruption, furthermore money is collected by a small autonomous Governmental unit (customs and excise), which makes bribery/kick-backs etc. more possible. 
Further ongoing analysis shows an interesting positive association between tariffs and corruption indices – it is not statistically significant but relationship is strongly positive 

## VAT places significant burden on patients.
One month ARV treatment taxed at 14% in South Africa could buy patient:
	2 loaves brown bread, 6 eggs, 1 litre milk, 1 kg maize meal, 1 kg bananas, 1⁄2 kg beetroot, 1⁄2 kg tomatoes, 1⁄2 kg broccoli, 1⁄2 kg lean mince, 1 chicken.
VAT-free medicines would improve diet of starving South African patients

- One month ARV treatment taxed at 14% in South Africa could buy patient:
- 	2 loaves brown bread, 6 eggs, 1 litre milk, 1 kg maize meal, 1 kg bananas, 1⁄2 kg beetroot, 1⁄2 kg tomatoes, 1⁄2 kg broccoli, 1⁄2 kg lean mince, 1 chicken.
- VAT-free medicines would improve diet of starving South African patients

- VAT

**Notes:**
Although the impact of taxes is not as obviously detrimental to access they do place a burden on patients. We looked at the tax paid on the average cost of ARVs in South Africa. It amounts to about $12 a month. The list here is what could be bought for that amount. ARVs are the most expensive medicines, but at the margin even for other cheaper drugs the 14% VAT rate in South Africa, and the taxes levied elsewhere (22% in Kenya), hit the poor and malnourished patients  - these sales taxes should be scrapped since they are so regressive

## 			  Medical bureaucracy 

South Africa - drugs wait for av. 39 months for registration (even if they are already registered in US, EU, Japan)

Namibia  - drugs require re-registration for all medicines already registered prior to 1990

Nigeria  - All (100%) goods inspected at ports and the President must approve all VAT waivers 	

**South Africa** - drugs wait for av. 39 months for registration (even if they are already registered in US, EU, Japan)
**Namibia**  - drugs require re-registration for all medicines already registered prior to 1990
**Nigeria**  - All (100%) goods inspected at ports and the President must approve all VAT waivers

- Non-tax & tariff barriers

**Notes:**
A less well documented problem is the non-tax and non-tariff barriers. While there is no doubt that drug safety is a vital issue, and rigorously testing new drugs or drug combinations is important – the furore over generic non-FDA approved FDCs is critical here – it does seem that many countries are delaying unnecessarily the approval of new drugs. South Africa here is an example of delay costing lives. Namibia requiring the re-registering of all drugs was madness. 

## Import tariffs restrict access to medicines
VAT impose intolerable and highly regressive burden on most vulnerable
Medical bureaucracies ripe for reform (or complete overhaul)
State-imposed barriers highly significant in block access to medicines, but are within the direct power of governments to remove
Other structural problems require long term solutions. Governments can save lives NOW by removing tariffs, taxes and reforming bureaucracy

- VAT impose intolerable and highly regressive burden on most vulnerable
- Medical bureaucracies ripe for reform (or complete overhaul)
- State-imposed barriers highly significant in block access to medicines, but are within the direct power of governments to remove
- Other structural problems require long term solutions. Governments can save lives NOW by removing tariffs, taxes and reforming bureaucracy

- Conclusions

**Notes:**
I urge PACHA to get behind this initiative, push WHA to discuss it. Increasing numbers of NGOs will join with us. And even the Global Fund, which has a clause in its donation policies opposing tariffs and taxes, may do so. Senators Brownback, Landrieu and Inhofe have introduced a bill on neglected diseases, which takes up the idea in this regard - section 9 of the bill will prevent US donations from going to countries which impose tariffs, since they are not needed, only protect industries that could do better from being exposed to competition, and harm the poorest.