COMMISSION RECOMMENDATION of 22 December 1969 to the Italian Republic on the adjustment of the State monopoly of a commercial character in cigarette paper (Only the Italian text is authentic) (70/122/EEC)

I

1. The Italian Government, by letter of 24 March 1959, informed the Commission of the European Economic Community that cigarette paper cut to size, in packets or tubes, is in Italy subject to a State monopoly of a commercial character within the meaning of Article 37 of the EEC Treaty.

Under that provision Member States are required progressively to adjust State monopolies of a commercial character so as to ensure that, when the transitional period has ended, no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of Member States.

2. Royal Decree No 70 of 13 January 1936 (which became Law No 1342 of 4 June 1936) gave the State the sole right to import and sell in Italy cigarette paper cut to size, in packets or rolls. The sale is carried out by the distribution network of the Amministrazione autonoma dei monopoli di Stato (AAMS). Export is subject to a permit.

The manufacture of those products by private undertakings requires a permit from the AAMS. The products must be sold to the AAMS at delivery prices fixed by the Minister of Finance on advice from the AAMS. The latter is, moreover, entitled to fix the quantity of paper which each permit holder may manufacture for domestic consumption. Production may be carried out directly by the AAMS. In fact it at present produces about 40 % of the Italian output, the remaining 60 % being produced by private undertakings.

3. Since 1958, the Italian Government has taken certain measures for the adjustment of the monopoly: (a) By Law No 1085 of 19 December 1958 and by Law No 825 of 13 July 1965 the principle of specifying retail price components was adopted for cigarette paper as for other products subject to a revenue-producing monopoly : for each price charged by the supplier of such products, the amount of the consumer tax and the amounts allowed to the AAMS for distribution costs and to retailers by way of rebate are fixed by law and published ; the total is the sale price to the public. Suppliers, by asking a particular delivery price, can thus determine the end-price at which their products will be sold.

(b) Presidential Decree No 390 of 9 March 1961, by way of derogation from the Decree of 1936, allowed the importation of cigarette paper into Italy within an annual quota equal to 5 % of domestic production. Prior approval of the AAMS is required for quantities in excess of 2 000 units and the product must have the same characteristics as those laid down for domestic production. No derogation from the AAMS sales monopoly is however permitted since the Decree of 9 March 1961 lays down Article 5 that cigarette paper from Member States of the EEC may, in the Italian territory over which the monopoly extends, be sold only through the monopoly's selling organization. The importation of cigarette paper for the purpose of sale is therefore conditional on the product being delivered to AAMS for sale on a consignment basis. The first quota (for the year 1961) was fixed by Ministerial Decree of 16 June 1961 at 465 000 000 sheets and/or tubes and has been increased each year : in 1966 it reached an amount of 935 281 090. However, no imports of the products in question have been effected.

4. The Commission is of the opinion that the measures so far taken are insufficient to achieve the objective of Article 37.

Since the end of the transitional period is approaching, measures should now be adopted to bring to an end all discrimination between nationals of Member States regarding the conditions under which goods are procured and marketed.

Article 37, which comes under the Title relating to the free movement of goods and, more particularly, under the Chapter concerning the elimination of quantitative restrictions between Member States, aims at achieving by the end of the transitional period in respect of products subject to a State monopoly of a commercial character (or a like system), the same result as that achieved for other products by the application of Articles 30 to 34, that is to say the free movement of goods.

However, a different procedure was provided in order to achieve that result in the sectors covered by State monopolies. Their progressive adjustment was provided for partly in order to take account of the fact that in the view of the Member States concerned the products subject to a monopoly presented special problems and partly so that the elimination of quantitative restrictions and of measures having an equivalent effect in those sectors should not be without practical result. There were indeed grounds for fearing that the liberalization of trade in respect of the products subject to a monopoly would not take place if the monopolies, by virtue of their exclusive right to import, export and market certain products, were to remain free to decide to what extent and under what conditions products from other Member States could be allowed on the domestic market (or, conversely, to what extent domestic products could be exported to other Member States).

It is for that reason that Article 37 contains the provision designed "to ensure that when the transitional period has ended no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of Member States".

It should be stressed that the ending of discrimination resulting directly from provisions applicable to products subject to a monopoly is not the only requirement laid down in Article 37 ; that objective could be achieved, in the absence of an Article on State monopolies, by means of other provisions of the Treaty, in particular those prohibiting charges having an equivalent effect to customs duties and measures having an equivalent effect to quantitative restrictions. It follows from what has been said above in relation to the special characteristics of the State monopolies and of the restrictions to which they can give rise that the objective of the "adjustment", i.e. of ensuring that "no discrimination exists", is to eliminate the possibility that the particular powers vested in the monopolies in respect of the importing and domestic marketing, or the exporting, of certain products might at the end of the transitional period still give rise to discrimination.

Since these are the objectives laid down in Article 37, it is incumbent upon Italy to adjust the monopoly in cigarette paper before the end of the transitional period in order that the objectives may be attained. On the other hand, it is for the Commission, in addition to its general duty to see that the Treaty is implemented, to make recommendations, in accordance with Article 37 (6), as to the manner in which the adjustment provided for in that Article shall be carried out.

The Commission considers that the objective of Article 37 will not be attained so long as the AAMS is in a position to decide whether, to what extent and in respect of which qualities the needs of the Italian market will be covered by suppliers from other Member States.

The adjustment of the monopoly, by means of the Decree of 9 March 1961 on the opening of quotas, has not in essence changed this situation, since sale on the Italian market has remained the preserve of the monopoly.

For these reasons it seems to the Commission that the best solution for attaining the objective laid down in Article 37, because there is no doubt that it will be effective, is to abolish the exclusive importing and marketing rights of AAMS, in so far as those rights concern trade between Member States.

5. The Monopoly in cigarette paper has the character of a revenue-producing monopoly. Pursuant to Article 90 (2) of the EEC Treaty undertakings having the character of a revenue-producing monopoly are subject to the rules contained in the Treaty, in particular the rules of competition, in so far as the application of such rules does not obstruct the performance in law or in fact of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Community.

The Commission is of the opinion that the revenue function of this monopoly does not justify the maintenance of the restrictions which now exist in respect of the importation and marketing of the products in question. Because of the general rise in the standard of living and of the steadily increasing preference of consumers for ready-made cigarettes, the importance of cut-to-size cigarette paper is continually deminishing, as is borne out by the figures for production and consumption.

In the circumstances the importance of the revenue function of that monopoly may well be doubted, since it consists in the main in reserving to the State the right to manufacture and/or sell and in fixing the selling price at a much higher level than the cost price. Through the adoption in 1958 of a system of specifying retail price components, thereby establishing a direct and constant relationship between each selling price and each delivery price, the Italian Government had already taken away much of the significance of the monopoly's revenue function : since the amount of tax corresponding to a particular selling price is fixed in advance, the ability of the tax authorities to derive the maximum tax revenue from the sale of each product - which, as has been shown, is the main taxation objective - has been correspondingly reduced. One should further add that, in this particular case, the fixing of a high selling price, in order to make a maximum profit, would eventually further hasten the decline of the product. In the circumstances, it seems that the revenue function of the monopoly could be fulfilled simply by means of a consumer tax.

II

On these grounds the Commission of the European Communities recommends the Italian Republic to take the following measures, in accordance with Article 37 of the EEC Treaty: 1. To allow cigarette paper, cut to size, in packets or tubes, to be imported from Member States without any restriction. To that end, all formalities necessary for the introduction of these products on to the Italian market must be such as can be carried out directly by the buyers or persons appointed by them, so that the latter may immediately dispose of the products without the intervention of the AAMS.

2. To allow all operations necessary for the marketing of cigarette paper from other Member States to be freely carried out on the Italian market. To that end, in particular: - to allow suppliers from other Member States to set up their own wholesale trade network in Italy and to hold stocks there;

- to allow prices for products from the other Member States to be freely agreed between sellers and buyers at the different stages of marketing;

- to allow suppliers from other Member States to advertise their products freely;

- to take all measures necessary to ensure that retailers are commercially independent of the public authorities.

3. To allow cigarette paper to be exported, without limitation, to the other Member States.

Done at Brussels, 22 December 1969.

For the Commission

The President

Jean REY