9. 6. 81 Official Journal of the European Communities No C 138/47 
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 
The text referred to the Committee has been published in Official Journal of the 
European Communities No C 264 of 11 October 1980, page 6. 
A. LEGAL BASIS FOR THE OPINION 
On 11 July 1980 the Council referred the abovementioned proposal to the Economic 
and Social Committee in accordance with Articles 99, 100 and 198 of the Treaty 
establishing the European Economic Community. 
B. OPINION OF THE ECONOMIC AND SOCIAL COMMITTEE 
The Economic and Social Committee prepared its opinion on the above matter at its 
185th plenary session held in Brussels on 25 and 26 February 1981. 
The full text of the opinion is as follows: 
THE ECONOMIC AND SOCIAL COMMITTEE, 
Having regard to the Treaty establishing the 
European Economic Community, and in particular 
Articles 99, 100 and 198 thereof, 
Having regard to the request, dated 11 July 1980 
from the Council of the European Communities for 
an opinion on the proposal for a Council Directive 
amending Directive 72/464/EEC on taxes other than 
turnover taxes which affect the consumption of 
manufactured tobacco, 
Having regard to the Rules of Procedure of the 
Economic and Social Committee, and in particular 
Articles 22, 46 and 47 thereof, 
Having regard to the decision taken by the President 
on 13 August 1980 and subsequently confirmed by 
the Bureau on 23 September 1980 instructing the 
Section for Economic and Financial Questions to 
prepare an opinion on the matter, 
Having regard to earlier opinions of the Economic 
and Social Committee on the harmonization stages 
for indirect taxes on manufactured tobaccos (*), 
Having regard to the report prepared by the 
rapporteur, Mr Miller, 
Having regard to the opinion issued by the Section 
for Economic and Financial Questions at its meeting 
on 20 January 1981, Having regard to the discussions on 25 February 
1981 during the 185th plenary session held on 25 and 
26 February 1981, 
HAS ADOPTED THE FOLLOWING OPINION 
unanimously: 
1. The harmonization of indirect taxation continues 
to be an essential element in the progress of the 
Community towards full economic and monetary 
union. If the Community is ultimately to become, in 
the full sense, a common market having the 
characteristics of a single domestic market, it is 
necessary that the system of indirect taxation should 
be harmonized in such a way as not to distort the 
conditions of competition within the various national 
markets and not to impede the free movement within 
the Community of the products to which the taxes 
apply. 
2. Since the Committee's previous opinion on 
tobacco taxation, the Community has taken a major 
step in tax harmonization with the adoption of 
Council Directive 77/388/EEC (2), ' the sixth 
Directive on the harmonization of value added tax, 
which provided for the application of common rules 
in the administration of that tax and a common basis 
for charging it. Tobacco taxation however remains 
(i) OJ No C 204, 30. 8. 1976, p. 1. (2) OJ No L 145, 13.6. 1977. 
No C 138/48 Official Journal of the European Communities 9. 6. 81 
the only area of excise taxation in the Community 
with which any progress has so far been made 
towards harmonization of tax structures. 
3. As regards tobacco, the Committee is pleased to 
note the passage, on 18 December 1978, of Council 
Directive 79/32/EEC (l) on the definition and 
classification, for fiscal purposes, of the various 
product groups of manufactured tobacco — cigars, 
smoking tobacco, etc. The Directive is a necessary 
preliminary to any proposal for a harmonized system 
of taxation for tobacco products other than cigarettes 
and it represents in its own right, a small but 
significant removal of a barrier to trade in certain 
categories of tobacco products between the countries 
of the Community. 
4. In the first Council Directive on tobacco tax 
harmonization (72/424/EEC) it was decided that 
cigarette taxation in the Community should consist 
in part of a specific element (a fixed amount per 
thousand cigarettes) and in part of an ad valorem 
element related to the retail price. The preamble to 
the Directive emphasizes the importance of freedom 
of competition. Tax harmonization is foreseen as a 
process during which factors likely to hinder free 
movement of products and distort the conditions of 
competition, whether at national or Community 
level, are to be progressively eliminated from the 
taxation systems, and by the final stage are to be 
removed entirely. 
5. Article 4.3 of the first Directive further provides 
that at the final stage 
— the same ratio is to be established for cigarettes in 
all Member States between the specific element of 
the taxation and the ad valorem element; 
and this is to be done in such a way that 
— the range of retail prices reflects fairly the 
differences in the manufacturers' delivery 
prices. 
In putting forward proposals for further stages of 
harmonization the Commission has had to pay 
regard to these two provisions. 
6. For the second stage of harmonization the 
Commission proposed narrowing the limits within 
which Member States have discretion to vary the 
'mix' of specific and ad valorem taxation. The 
Council agreed that during the second stage, which 
came into force on 1 July 1978 and runs until the end 
of 1980, the specific element should not be less than 
5% nor more than 55% of the total taxation (taking 
excise and VAT together) on the most-popular-
priced cigarettes in each country. However, the 
Commission made no proposal as to what the final 
structure of taxation should be towards which this 
(i) OJ No L 10, 16. 1. 1979. process of convergence should lead, and there was no 
agreement on that point during the discussion of the 
second stage within the Council. The reason 
underlying this failure to agree is that there was (and 
for that matter, still is) no consensus within the 
Community on the interpretation to be placed on the 
word 'fairly' in Article 4.3 of the first Directive and 
hence no generally accepted view about what a 'fair' 
ratio of specific and ad valorem taxation would be. 
7. In the 1976 opinion of the Economic and Social 
Committee the Commission was urged to make 
proposals for the final stage of harmonization as 
early as possible during the second stage. But the 
Committee added that considerable further study 
would be warranted before such proposals could be 
formulated, and that such a study should include a 
full evaluation of the social and economic effects not 
only of the fiscal structure but also of the other 
obstacles to equal and fair competition in the 
Community market. The Committee went on to say 
that if this were not done, harmonization in the fiscal 
field alone could aggravate rather than reduce 
distortion in conditions of competition in the 
Community as a whole. 
8. What the Commission has proposed, for a third 
stage of harmonization, beginning on 1 January 1981 
and running until the end of 1986 (2), is that the 
specific element of the excise, as a percentage of the 
total tax (excise and VAT) at the most popular price, 
should be as follows: 
— in 1981 and 1982: not less than 5% nor more than 
55% (as at present); 
— in 1983 and 1984: not less than 7 V2 % nor more 
than 42^2%; 
— in 1985 and 1986: not less than 10% nor more 
than 35%. 
9. The Commission has still made no formal 
proposal for the final stage. It believes it would be 
premature to settle the final stage now, because a 
lengthy period of adaptation would in any case be 
necessary before it could be reached, and because in 
a number of Member States the cigarette markets are 
at present in rapid transition. It recognizes, however, 
that the Community cannot be expected to move 
further without any sense of its intended destination, 
and it therefore puts forward a possible taxation 
structure to serve as a 'reference point' for the final 
stage and thus reduce uncertainty about what the 
destination is to be. It indicates that at the final stage 
(2) Because the Council was not in a position to decide on 
this Proposal before 31 December 1980, it took a 
Decision on 22 December 1980 (80/1275/EEC — OJ 
No L 375, 31. 12. 1980) to extend the second stage until 
30 June 1981. The Committee in its opinion of 10. 12. 
1980 (Doc. CES 1350/80) expressed its approval of the 
proposed extention of the second stage. 
9. 6. 81 Official Journal of the European Communities No C 138/49 
the specific element should be 20% of the total 
taxation falling on the most-popular-priced 
cigarettes in each country. 
10. If the Council accepted the present proposals, 
the Member States would not, of course, be formally 
committed to the Commission's intended final stage. 
But by accepting it, the Council would, in the 
opinion of the Economic and Social Committee, 
have made a decision which would lead logically to a 
taxation structure containing a 20% specific element 
at the final stage. 
11. On the information available, the Committee 
cannot accept that this would be a desirable outcome. 
So far as the Committee knows, the Commission's 
conclusions about what would be appropriate at the 
final stage are not based on any such studies as the 
Committee in its 1976 opinion (*) believed to be 
essential. They are instead based on what the 
Commission itself in its explanatory memorandum 
admits to be a partial approach based on general 
assumptions. 
12. Moreover, the Committee disagrees with the 
Commission's proposal inasmuch as it is based on 
progressive alteration of the fixed (maximum and 
minimum) ratios between the specific and the ad 
valorem elements of taxation. 
13. In the 1976 opinion, the Committee questioned 
whether attempting to achieve the same ratio between 
the specific and the ad valorem elements of taxation 
in all Member States was the best way of moving 
towards cigarette tax harmonization in the 
Community. In all 10 Member States, taxation 
absorbs 57 % or more of the price of cigarettes; in 
seven of them, more than 70%; and in one 
(Denmark) as much as 88%. At these very high levels 
of tax, the rate of ad valorem taxation has a greater 
influence on the conditions of competition than any 
other element in the fiscal structure. This is because 
of the very strong 'multiplier' effect of high ad 
valorem taxation on manufacturers' delivery prices. 
Any change in the ex-factory price is multiplied up 
several times in working through into retail prices. 
14. Since the objective is to eliminate those 
elements in the fiscal system which lead to distortions 
or restrictions on competition, it is desirable to move 
towards harmonizing the element of ad valorem 
taxation rather than continue to follow the present 
approach of trying to harmonize the ratio between 
the ad valorem and the specific elements. 
(i) OJ No C 204, 30. 8. 1976. 15. The ad valorem element consists in part of the 
ad valorem excise duty and in part of value added 
tax. Harmonizing it would imply that the combined 
rate of these two taxes would become the same on 
cigarettes throughout the Community. Member 
States would remain free to fix their own rate of value 
added tax but would then have to fix the rate of the 
ad valorem excise duty so that the combined rate of 
the two taxes would be at the level agreed for the 
Community as a whole. Member States would also 
remain free to fix their own rate of specific excise 
duty, and this degree of freedom would enable them 
to impose taxation on cigarettes at whatever overall 
level they judged necessary to meet their national 
fiscal needs. 
16. Although not disposing of all the problems 
which have so far impeded agreement about the final 
stage, this approach would be better than the present • 
attempt to harmonize the ad valorem/specific ratio. 
Among other things, it seems likely to provide a more 
flexible approach in the conditions of an enlarged 
Community. 
17. The Committee therefore recommends that 
Article 4.3 of the first Directive should be amended, 
to read as follows 
'At the final stage of harmonization of structures, 
the combined rate of proportional taxation (that is 
to say, the sum of the rates of the proportional 
excise duty and the turnover tax calculated on the 
retail selling price) shall be the same on cigarettes 
in all Member States, and shall be such as will not 
distort conditions of competition in national 
markets nor impede the free movement of 
cigarettes within the Community.' 
18. The Committee considers that the objective 
must be to find a solution compatible with this 
recommendation which can reasonably be put 
forward as being a practical solution for the 
Community as a whole at the final stage of tax 
harmonization, taking into account the interests of 
businesses concerned with supplying cigarettes to the 
market (tobacco farmers, cigarette manufacturers, 
importers and distributors), the pattern and volume 
of employment in these activities, the interests of 
consumers and the interests of governments for 
whom tobacco taxation is a major source of 
revenue. 
19. Any proposal leading towards such a solution 
must be based on a full social and economic study 
such as the Committee called for in 1976. This study 
ought to take into account at least the following 
aspects: 
No C 138/50 Official Journal of the European Communities 9. 6. 81 
(a) the effect of different mixtures of ad valorem 
and specific taxation: 
— on the pattern of employment in cigarette 
manufacturing and distribution, 
— on the conditions of competition and the 
profitability of these activities in national 
markets, and 
— on competition in intra-Community trade, 
bearing in mind the development of competition 
policy at Community level in relation to the 
cigarette industry; 
(b) the influence of the excise tax structure on the 
range of consumer choice; 
(c) the special problem of import penetration in 
France and Italy, and its consequences for 
tobacco farming in the Community including 
Greece, bearing in mind the existence of surplus 
stocks of certain varieties of Community-grown 
tobacco; 
(d) the relationship between tax increases and price 
increases on cigarettes under different mixtures 
of ad valorem and specific taxation; the taxation 
structure which would be most appropriate to 
provide government with a stable revenue in a 
price competitive market; and the effect of 
inflation on this aspect of excise taxation 
policy. 
20. To complete such a study will require more time 
than will be available during the remainder of the six-
month prolongation which the Commission has 
proposed for the present stage of harmonization. To 
allow the necessary time, the Committee must now 
recommend a further prolongation of the present 
stage (with the specific element remaining not less 
than 5% nor more than 55% of total taxation at the 
most popular price). 
Supplementary points 
21. In addition to its major proposal regarding the 
'mix' of ad valorem and specific taxation, the 
Commission makes three other proposals. 
22. Member States have power to impose a 
minimum excise duty, at a wholly specific rate, 
provided it does not exceed 90% of the total amount 
of excise duty, specific and ad valorem, that is 
charged on cigarettes at the most popular price. Five 
Member States have made use of this power. It is 
intended to provide a limited safeguard against 
abnormal competition of the kind to which high ad valorem taxation (a high multiplier) gives an 
incentive. But the safeguard is ineffective unless the 
minimum duty is set at a relatively high level. If 
harmonization with a low multiplier were finally 
achieved, the safeguard might become unnecessary. 
Meanwhile, however, the Section sees no reason to 
alter the existing rule and, therefore, does not agree 
with the Commission's proposal to reduce the ceiling 
for the minimum duty from 90% to 80% of the 
amount of duty at the most popular price. 
23. The first tobacco taxation Directive envisaged 
that by the final stage of harmonization of structures, 
the rules for collecting the excise duty should also be 
harmonized. This concerns the system for calculating 
the duty payable by manufacturers and importers 
and the credit period allowed for paying it. On these 
matters, there are substantial differences between 
Member States. The Commission now proposes that 
the Council should adopt common rules by the end 
of 1983, to come into force by 1 January 1985. 
In its 1976 opinion, the Committee pointed out that 
varying practices concerning funding arrangements 
by way of extended tax credit and other current or 
potential subsidized sources of capital have a major 
bearing upon an equitable choice of taxation 
structure. The Committee also urged the Commission 
to consider the implications of such practices upon 
conditions of competition in the Community as a 
unified market. 
The first Directive already provides that in each 
Member State the same rules must apply to national 
manufacturers and to importers, both as regards 
levying the duty and paying it; and the Directive 
requires Member States to apply these rules in a non­
discriminatory fashion. There are, however, 
differences of view as to whether the different credit 
periods allowed in Member States amount in practice 
to a distortion of competition in the Community as a 
whole, and the Section considers that this question 
would require further study before any proposal were 
made. 
24. The ad valorem element of the excise duty is 
charged as a percentage of the retail price, but the 
first Directive gives Member States power to exclude 
customs duties from the basis of calculation. No 
Member State has made use of this power, and the 
Commission proposes that it should be 
discontinued. 
Customs duties (whether on the cigarettes themselves 
or on materials) are one among many items of cost 
which have normally to be recovered in prices and 
there is no reason for singling them out and 
excluding them from the tax base. The Committee 
therefore agrees with this proposal. 
9. 6. 81 Official Journal of the European Communities No C 138/51 
Summary 
25. To sum up the Committee's opinion 
(a) the Committee disagrees with the Commission's 
main proposal for the third stage of cigarette 
excise tax harmonization; 
(b) the Committee considers it desirable to move 
towards harmonizing the element of ad valorem 
taxation instead of following the present 
approach of seeking to harmonize the ratio 
between the ad valorem and the specific 
elements, and accordingly recommends an 
amendment of Article 4.3 of the Council 
Directive 72/424/EEC; 
(c) but, as the Committee pointed out in 1976, any 
further harmonization proposal must be based 
on a full study of the social and economic effects 
of the fiscal structure and of other factors 
affecting competition in Community markets; 
Done at Brussels, 25 February 1981. (d) to allow time for such a study to be completed, 
the Committee must now recommend a 
prolongation of the second stage beyond the six-
month prolongation which the Commission has 
already proposed; 
(e) the Commission makes three supplementary 
proposals. The Committee agrees with the 
proposal to discontinue Member States' 
discretionary power to exclude customs duties 
from the basis of calculation of the ad valorem 
element of the cigarette excise duty. The 
Committee considers that further study is 
required before a decision could be made 
regarding the appropriate time for adopting 
common rules for collecting the excise duty. The 
Committee disagrees with the proposal to reduce 
the ceiling for the discretionary minimum excise 
duty. 
The Chairman 
of the Economic and Social Committee 
Tomas ROSEINGRAVE