12. 9. 88 Official Journal of the European Communities No C 237/29 
percentage equal to 25 % of the difference between 
the current levels of the rates and those which are 
to apply on 1 January 1993. The first reduction 
should be made by 31 December 1989.' 
3.3. In line with point 2.7 above, if convergence were 
obligatory, complete harmonization of indirect taxes 
could even be postponed until after the scheduled date 
of 1 January 1993 (e.g. until 1995). In this case, the 
Done at Brussels, 7 July 1988. 
1. Introduction 
1.1. In the context of the removal of border controls 
in 1992 the approximation of taxation on tobacco prod­
ucts is particularly important because of their special 
characteristics: they are goods of high value, low bulk, 
and widespread consumption, and can be transported 
accross borders with ease. 
1.2. The Commission has brought forward two dif­
ferent proposals: one for cigarettes which comprise over 
90% of the market and the second for manufactured 
tobacco other than cigarettes. These proposals replace 
previous proposals for the progressive harmonization 
of tobacco excise duties. 
(') OJ No C 251, 19. 9. 1987, p. 3 and 4. figure of 25% proposed in points 3.1 and 3.2 above 
should be altered accordingly. 
The Commission could suggest to the individual Mem­
ber States appropriate compensatory measures when 
the loss of excise revenue in any Member State is so 
significant that it creates serious revenue needs, as a 
direct result of tax harmonization, as well as social 
and economic difficulties which could lead to wider 
disparities between the regions of the Community. 
The Chairman 
of the Economic and Social Committee 
Alfons MARGOT 
1.3. The Commission's proposal for cigarettes keeps 
to the structure of a mixed excise (part specific and 
part ad valorem as laid down in Directive 72/464/EEC. 
It also lays down a common specific duty and a band 
of ad valorem rates covering the proportional excise 
duty and VAT. 
1.4. In the case of manufactured tobacco other than 
cigarettes, where there is no existing Community law 
beyond a common system of product classification, the 
Commission proposes a common ad valorem structure 
and sets rate bands for the various products covering 
both the excise duty and the VAT. 
1.5. The Commission has not yet produced firm 
proposals on the mechanics of these taxes—how they 
are to be assessed and collected—in the new context of Opinion on the completion of the internal market: proposal for a Council Directive on the 
approximation of taxes on cigarettes, and proposal for a Council Directive on the approxi­
mation of taxes on manufactured tobacco other than cigarettes (l) 
(88/C 237/10) 
On 11 September 1987, the Council decided to consult the Economic and Social Committee, 
under Article 198 of the Treaty establishing the European Economic Community, in the 
abovementioned proposals. 
The Section for Economic, Financial and Monetary Questions, which was responsible for 
preparing the Committee's work on the subject, adopted its Opinion on 22 June 1988. The 
rapporteur was Mrs Robinson. 
At its 257th plenary session (meeting of 7 July 1988), the Economic and Social Committee 
adopted the following Opinion by a large majority in favour, with 2 votes against and no 
abstentions. 
No C 237/30 Official Journal of the European Communities 12. 9. 88 
a border free European Community. However, it would 
appear that a system of linked bonded warehouses is 
envisaged. 
2. General comments on the Commission's proposals 
2.1. The move from a customs union to an internal 
market 
The Economic and Social Committee appreciates the 
desire of the Commission to present a pragmatic set of 
proposals for the harmonization of tobacco excise 
duties so as to cause the least possible changes for 
Member States when the Community moves from a 
customs union to an internal market. The Com­
mission's proposals are based on a harmonization of 
the existing structures and rates of tobacco excise duties 
which were established to lay the foundation for the 
progressive movement, in stages, towards a tax regime 
which would ensure free competition in a customs 
union in which border checks were maintained. In the 
event, progress through the stages to the final stage of 
harmonization of structure for tobacco duties has been 
very limited. Equally there has been limited progress 
with the approximation of tobacco excise duty rates. 
So long as border checks operate on both traders and 
individuals some differences in excise duty rates can be 
tolerated within a harmonized structure since means 
can be taken to ensure that all tobacco products bear 
the tax rate of the country of consumption. The existing 
structures and rates which reflect the needs and circum­
stances of a customs union do not necessarily provide 
a sound basis for tobacco duties in a single, border-
free, internal market. The circumstances of an internal 
market without border checks are so different and 
give rise to such different problems of collecting and 
controlling excise duties that a more radical approach 
might have been more appropriate. The approximation 
of rates, as proposed by the Commission, is not so 
important for registered traders (whichever method of 
collection and control is adopted) since they will sell 
their products at the rates of tax prevailing in the 
country of consumption. The nature and value of 
tobacco products, and the fact that excise duty rep­
resents a high proportion of their price, means that 
cross-border shopping by individuals will be encour­
aged by the absence of border controls. Thus a new 
problem of control is created. Neither alternative sys­
tems of excise duty for tobacco products, nor alternative 
methods of tax collection have been put forward by the 
Commission. 
2.2. Lack of data and analysis of the competition 
effects of excise duties and other factors affecting 
tobacco manufacture and purchase 
The Commission has presented very little up-to-date 
data or analysis relating to the effects of their proposals on prices and the consequent effects on tobacco grow­
ing, tobacco manufacturing and employment and 
importation from outside the Community. Nor do we 
have an analysis of the relative effects of excise duties 
and other factors on competition in the tobacco indus­
try. The Economic and Social Committee regrets that 
the Commission has not undertaken and published the 
full social and economic study of the effects of different 
possible harmonized fiscal structures and other factors 
affecting competition in Community markets which it 
urged in its Opinion on the Commission's proposal for 
a Council Directive amending Directive 72/464/EEC 
on taxes other than turnover taxes which affect the 
consumption of manufactured tobacco (*), which 
request was a reiteration of a request made in a previous 
Opinion of 1976 (2). The Economic and Social Commit­
tee repeats its earlier requests for such data and analysis. 
2.3. Difficulty in presenting a firm opinion 
The lack of alternative schemes, the lack of data and 
analyses of the effects of different taxation regimes and 
other factors on the tobacco industry and the failure to 
present proposals for the methods of assessment and 
collection together mean that the Economic and Social 
Committee finds it difficult to reach firm opinions on 
the current Commission proposals. The proposals will, 
as far as is possible, be judged in the light of criteria 
for an excise on tobacco products in an internal market. 
2.4. Criteria for an excise for tobacco products in an 
internal market 
There are two sets of criteria on which proposals for 
the structures and rates of tobacco excise duties in an 
internal market should be judged, namely (1) factors 
relating to competition and (2) collection and control 
of duties. Any tax system introduced for the internal 
market should reinforce free competition, secure 
sources of supply and variety of supply and of prices, 
and at the same time should not impose an undue 
burden on any country. The Economic and Social Com­
mittee has emphasized in its earlier Opinions on tobacco 
excise duties that: 
'The primary objective of harmonization, laid down in 
the Treaty of Rome, is to create conditions of undis-
torted competition within the Community as a single 
domestic market, and that the possibility of greater 
interpenetration of the national markets of the Member 
States is to be assured as a consequence of the achieve­
ment of undistorted competition in the Community 
market as a whole'. 
To this aim must now be added the objective of permit­
ting free movement of goods without the need for 
border checks. 
(!) OJ C 138, 9. 6. 1981, p. 47 ff. 
(2) OJ C 204, 30. 8. 1976. 
12. 9. 88 Official Journal of the European Communities No C 237/31 
3. Cigarettes 3.2. The Commission's approach 
3.1. The present system 
3.1.1. Under the present system, as required by the 
Council Directive on taxes (other than turnover taxes) 
on the consumption of manufactured tobacco, all Mem­
ber States apply a mixed tax structure to cigarettes (1) 
a specific component—an amount per 1 000 cigarettes 
and (2) a proportional component consisting of two 
elements: an ad valorem excise duty and VAT both 
expressed as percentages of the retail selling price. 3.2.1. The Commission therefore seeks to harmonize 
the level of taxation on cigarettes within the existing 
framework of a mixed tax structure. Prices on cigarettes 
between Member States have to be brought more closely 
together in order to ensure free competition and to 
permit free movement of tobacco products. Because of 
the multiplier effect the ad valorem excise duty and 
VAT must be jointly fixed and there can be no flexibility 
in the specific excise duty. 
3.1.2. As laid down in Directive 77/805/EEC the 
amount of specific excise duty must lie within the range 
5 to 55% of total tax burden calculated on the basis of 
the price of cigarettes in the most popular price catego­
ry. The ad valorem exicse duty is calculated on the 
maximum retail selling price inclusive of all taxes (the 
specific excise duty, the VAT and the ad valorem excise 
duty itself). The VAT is calculated in a similar manner. 
Proportional or ad valorem taxes based on the final 
selling price have the effect of multiplying differences 
in the manifacturer's pre-tax selling prices into larger 
differences in retail prices. Trade margins which are 
expressed as a percentage of the maximum retail prices 
further add to the multiplier effect. Differences between 
the manufacturer's prices for different brands are thus 
magnified in the final price. 3.2.2. In determining the total tax on cigarettes the 
Commission has calculated the arithmetic average of 
the existing specific and ad valorem components in the 
12 Member States. This results in a higher overall 
burden of cigarette duty in the Community as a whole 
than at present, and is thus in accordance with the 
Community's health policy. 
3.3. Proposal 
3.3.1. A specific excise of 19,5 ECU per 1 000 ciga­
rettes (to be periodically adjusted in line with the Com­
munity consumer price index). An ad valorem tax 
(excise plus VAT) between 52% and 54% of the retail 
selling price inclusive of all taxes. 
3.1.3. Member States have had considerable discre­
tion in setting levels of taxation but home-produced 
cigarettes and imports must be treated the same by each 
State. 3.3.2. These rates are to be reached by 31 December 
1992 by any route determined by the individual Mem­
bers as long as they do not move away from the agreed 
rates. 
3.1.4. As a result of the multiplier effect of ad valo­
rem taxation there are considerable differences in price 
between brands within each Member State. These dif­
ferences, however, are not so great as the price dispar­
ities between cigarettes from one Member State to 
another. 
3.1.5. Under the existing arrangements producers 
and authorized traders are obliged to pay the excise 
duty due in the country of consumption (either immedi­
ately or when the goods are released from a bonded 
warehouse). There are considerable differences in the 
methods of collection and control employed and in 
the arrangements (including the periods of time before 
payments of tax must be made) for the collection of 
duties. Individuals are subject to control at borders to 
ensure that duties are paid at the rate prevailing in the 
country of consumption. An amount of duty-free is 
permitted. 4. Detailed comments 
4.1. The choice of tax instrument 
AAA. The choice of tax instrument has attracted 
major differences of view in the Committee, reflecting 
the diametrically opposed interests of a number of 
Member States. Those countries producting dark 
tobacco and accustomed to cheaper cigarettes prefer to 
minimize the specific element of the tax, whilst those 
manufacturing cigarettes from blond tobacco and 
accustomed to the more expensive cigarettes would 
prefer the duty to be only specific in form. The former 
argue that an ad valorem system is simple and would 
directly reflect differences in 'product price'. The latter 
argue that a specific tax would not penalize the quality 
product. They also ask why tobacco products should 
be the only excise not based on specific criteria. In 
practice the Commission's proposal for maintenance of 
a mixed system appears to be the only basis for a 
compromise which would lead to a decision on a com-
No C 237/32 Official Journal of the European Communities 12. 9. 88 
mon system for the internal market. It also remains to 
be seen whether the Commission's proposed mix of the 
two types of tax (specific and ad valorem is the most 
judicious. 
4.1.2. It is not certain whether the Commission's 
arithmetic approach is really the most equitable. In 
adding the specific rates and the ad valorem rates 
together, a certain weighting effect is inevitable to the 
extent that the level of these rates depends in part on 
actual prices in the Member States. 
4.2. Effects on the European tobacco industry and 
employment 
4.2.1. Structure of the European tobac­
co industry. The present structure of the European 
tobacco industry in the 12 Member States is best 
described as 'fragmented'. Several countries grow 
tobacco and all manufacture and distribute. Several 
countries have state tobacco monopolies, and patterns 
of taste,.consumption and products vary widely. The 
Commission proposals do not address impediments to 
free competition apart from differences in excise duty. 
It is therefore difficult to determine the precise effect of 
differential excise duties against other factors distorting 
competition. 
4.2.2. Fixing of the retail sale price 
for the purposes of assessing tax. The 
Commission's proposals require the manufacturer to 
fix the maximum retail selling price of cigarettes so that 
the correct amount of tax can be calculated. It has been 
argued that any system which requires the manufacturer 
of a product to fix the maximum retail price of a 
product (even though the actual selling price may be 
below this) might be inconsistent with the principles of 
the internal market and with the competition rules of 
the Treaty of Rome and that this provision might be 
tested in the courts. The ESC cannot make a judgment 
on the matter until the proposals on collection and 
monitoring are known. 
4.2.3. State monopolies. No specific action 
has been proposed on monopolies controlling pro­
duction and/or distribution. Where monopolies exist 
there cannot be free competition between cigarettes 
produced or distributed by the home Member State and 
cigarettes produced and distributed by another Member 
State as required in the internal market. 
4.2.4. Effects on manufacturing and 
jobs. In those countries where the price of locally 
produced popular brands is at present low and will 
consequently rise when the Commission's proposals are 
implemented the effect could be substantial reductions 
in home production and an advantage to cigarettes 
from other Member States. The substantial reductions in home production would entail substantial job losses 
in the countries concerned. The general effect would be 
a redistribution of manufacturing location with conse­
quent effect on jobs in poorer regions. 
4.3. Effects on prices and government revenues 
4.3.1. Differential price effects. In Mem­
ber States where the specific duty is presently predomi­
nant and which face reductions in taxation under the 
proposals (Denmark, Ireland, United Kingdom) the 
decrease in price will be smaller for the more expensive 
brands. In Member States which will experience an 
increase in taxation, the increase in price will be greater 
for the most popular brands. Thus the proposal will 
enlarge the current price spread between cheapest and 
most expensive cigarettes in Denmark, Ireland, the 
United Kingdom, Germany and the Netherlands and 
narrow the price spread in other Member States, 
notably Greece and Portugal. 
4.3.2. Distributional consequences. The 
use of the Commission's arithmetic average means that 
the most pronounced effect will be on the poorest 
people in the poorest countries where the least expens­
ive cigarettes will cost more. In Portugal and Greece 
price rises are likely to be of the order of 200 to 300 %. 
The increase in price will be greatest in the countries 
with lowest per capita income. 
4.3.3. Smuggling. Such large price increases in 
the countries which are to have higher taxation may 
generate an increase in smuggling from third countries. 
4.3.4. Exchange rate fluctuations. Since 
the specific element of the duty is expressed in ECUs, 
exchange rate fluctuations are likely to require changes 
in tax rates. 
4.3.5. Revenue consequences. The revenue 
consequences will be particularly serious for Denmark 
and Ireland who also stand to lose revenue under the 
VAT proposals of the Commission. Conversely, Lux­
embourg is concerned about the big increase in taxation 
which the proposal would impose on it. 
4.4. Agriculture. The Commission says nothing 
about the effect on tobacco growing within the Com­
munity. The tobacco grown in Europe is the cheaper 
tobacco and the overall effect is likely to be negative 
on cheap products. There may also be an increased 
importation of light tobaccos from countries outside 
the Community. 
12. 9. 88 Official Journal of the European Communities No C 237/33 
5. Manufactured tobacco other than cigarettes 
5.1. Present system 
There is at present no common basis for excise duties 
on manufactured tobacco other than cigarettes amongst 
Member States. Countries differ, with some using a 
proportion of the selling price including all taxes, some 
specific duties and some a combination of the two. So 
long as the Community remains a customs union with 
border checks these differences can be tolerated since 
all sales bear the tax due at the point of consumption 
(with the exception of limited amounts of duty free 
tobacco for travellers). The purpose of the Com­
mission's proposal is to establish a common structure 
and to approximate tax levels so that distortions of 
trade and competition do not arise once border checks 
are eliminated. 
5.2. Proposal 
5.2.1. The Commission proposes that the excise duty 
should be a proportional tax based on the maximum 
retail selling price inclusive of all taxes (excise plus 
VAT). Such an ad valorem system currently applies in 
the majority of countries. Nine countries employ it with 
respect to cigars and cigarillos and seven in relation 
to smoking tobacco, snuff and chewing tobacco. The 
Commission claims that this system has the advantage 
of simplicity, that it does not require rates to be varied 
or make necessary additional definitions. 
5.2.2. The Commission proposes that the total inci­
dence of these taxes should be determined by the arith­
metic average of rates yielded by the sum of excises and 
VAT as follows: cigars and cigarillos 35%; smoking 
tobacco 55 %; snuff and chewing tobacco 42 %. 
5.2.3. Because VAT is calculated on price inclusive 
of excise duty, no additional flexibility can be intro­
duced into the excise duty. The element of flexibility is 
expressed as one percentage point either side of the 
average of the combination of excise duty and VAT. 
5.3. Effects 
5.3.1. The incidence of tax on tobacco would be much 
lower than on cigarettes. On cigars and cigarillos, prices 
and taxes would rise in Belgium, Luxembourg, the 
Netherlands, Spain, Germany and Greece (where they 
would more than double) and fall in the other Member 
States. With smoking tobacco, there would be little 
change in the Netherlands and Germany, a rise in 
Belgium, Luxembourg, Spain and Portugal and a fall 
in the others. Snuff, which is currently free of excise 
duties in the United Kingdom would once more be subject to excise duties. Total revenue, assuming 
unchanged consumption, would be expected to rise. 
5.4. Comments 
5.4.1. Basis of approximation. Withrespect 
to smoking tobacco, it is not relevant to claim that an 
ad valorem system is used by the majority of countries. 
Eighty per cent of the consumption of smoking tobacco 
arises in three countries only, two of those have a 
mixed system of specific and ad valorem and those two 
account for 70% of total consumption. In the light of 
these facts it might be better to opt perhaps for a mixed 
system. 
5.4.2. Price of cigars and cigarillos. 
Taking into account the structural crisis which the cigar 
and cigarillo industry is undergoing, the proposed tax 
rates appear to be too high and may result in loss of 
jobs affecting some of the less favoured regions. 
5.4.3. Substitution. The combination of the 
proposals for cigarettes and the proposals for tobacco 
would alter the price relationship between the two 
products and there may be a substitution of roll-your-
own tobacco for cigarettes especially in those countries 
which would experience a huge increase in the price of 
the lowest priced brands of cigarettes. It would be 
sensible to take account of the price relationship in 
those Member States where both products have a sub­
stantial market share. 
5.4.4. Snuff. In view of the proposed abolition of 
other minor excise, the Committee recommends the 
elimination of duties on snuff on de minimis grounds. 
6. Health 
The Commission proposals have taken health policy 
into account in choosing rates which involved a heavier 
overall tax burden on tobacco products. However, 
countries where the price of cigarettes would fall as a 
result of the proposals are concerned that this is con­
trary to the health policies of their Governments and 
of groups interested in promoting health. Although 
there appears to be no conclusive evidence that high 
prices are the determining factor in discouraging people 
from smoking, recent studies have demonstrated that 
high prices can lead to reduced consumption by smo­
kers. 
7. Conclusion 
Central to any appreciation of the competition and 
other effects of any particular form of tobacco duties 
is an appreciation of the effects of particular forms of 
collection and control. This is particularly significant 
now that the Community is to move from a customs 
union to an internal market. The Commission has 
No C 237/34 Official Journal of the European Communities 12. 9. 88 
suggested that either banderoles or a system of linked 
bonded warehouses could be the method of collection 
and control and appears to favour the latter. But there 
is no proposal currently on the table which would 
provide the basis for a judgement on the appropriate­
ness of one or another set of rates. On the other 
hand the health policy of the Community has produced 
proposals for labelling which would be language (and 
thus in party country) specific. In view of the lack 
of firm proposals on the methods of assessment and 
collection and in view of the lack of evidence from the 
Commission on the effects of their proposals on the 
structure of the tobacco industry, on employment in 
that industry, on agriculture and on Government 
budgets and personal expenditure, the Committee is 
unable to come to a firm opinion on the proposals now 
before it. The present set of proposals merely deal with 
the basic structure and rates of tobacco excise duties. 
But unless the method of assessment and collection is 
Done at Brussels, 7 July 1988. 
1. General comments 
1.1. The Commission's proposal for the harmoniza­
tion of rates of excise duty on mineral oils is part of 
the overall plan for the harmonization of indirect taxes, 
the removal of tax frontiers and the setting-up of the 
internal market. Removal of tax frontiers will require known it is not possible to comment definitively on 
proposals for rates. In the case of excise duties we seem 
to have the cart put to us before the horse. Until we 
know which methods of tobacco excise tax collection 
and control are proposed for the internal market then 
we cannot form a definite opinion on whether the 
correct structure and mix of structures is selected and 
whether the rates are appropriate. In particular we 
cannot give an opinion on whether the rates must be 
completely approximated or whether there is room for 
greater flexibility than is proposed by the Commission. 
Since all the revenue from tobacco excise duties belongs 
to the Member States there should be as much flexibility 
as is consonant with the requirements and the proper 
operation of the internal market. The converse of this 
statement is that there should be only that degree of 
harmonization of excise duties which is necessary to 
the operation of the internal market. 
The Chairman 
of the Economic and Social Committee 
Alfons MARGOT 
the approximation not only of turnover taxes but also 
of special excise duties. The aims of the Commission's 
proposal are therefore welcomed. But the practical 
achievement of this objective raises problems which the 
proposal for a Directive fails to solve or which could 
be solved differently. 
2. Specific comments Opinion on the proposal for a Council Directive on the approximation of the rates of excise 
duty on mineral oils (J) 
(88/C 237/11) 
On 11 September 1987 the Council decided to consult the Economic and Social Committee, 
under Article 198 of the Treaty establishing the European Economic Community, on the 
abovementioned matter. 
The Section for Economic, Financial and Monetary Questions, which was responsible for 
preparing the Committee's work on the subject, adopted its Opinion on 21 June 1988. The 
rapporteur was Mr Broicher. 
At its 257th plenary session (meeting of 7 July 1988) the Economic and Social Committee 
adopted the following Opinion with no dissenting votes and four abstentions. 
(!) OJ No C 262, 1. 10. 1987, p. 8. 2.1.1. The Commission is proposing rates of duty 
which, if adopted, would lead to a higher overall burden