30. 8. 76 Official  Journal  of the European  Communities No C 204/1 
II 
(Preparatory  Acts) 
ECONOMIC  AND  SOCIAL  COMMITTEE 
Opinion  on the proposal  for a Fifth  Council  Directive  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  No C 45 of 
27 February  1976,  page  4. 
A. LEGAL  BASIS  FOR  THE  OPINION 
On 23  February  1976  the  Council  referred  the  abovementioned  proposal  to the 
Economic  and  Social  Committee  in accordance  with  Article  100  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 
140th  plenary  session,  held  in Brussels  on 30 June  and  1 July  1976. 
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 
Article  100  thereof, 
Having  regard  to the  request  for  an opinion  made 
by the  Council  of the  European  Communities  on 
23 February  1976, 
Having  regard  to the  decision  taken  by its Bureau 
on 24  February  1976,  instructing  the  Section  for 
Economic  and  Financial  Questions  to draw  up 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  submitted  by  the 
rapporteur,  Mr O'Ceallaigh, 
Having  regard  to the  opinion  issued  by the  Section 
for Economic  and  Financial  Questions  at its meeting 
on 1 June  1976, 
Having  regard  to the discussions  at its 140th  plenary 
session,  held  on 30 Tune  and  1 Tuly  1976  (meeting 
of 30 June  1976), 
HAS  ADOPTED  THE  FOLLOWING  OPINION 
unanimously,  with  six abstentions: 
No C 204/2 Official  Journal  of the European  Communities 30. 8. 76 
1. Introduction 
1.1. The  Committee  .sees  the  harmonization  of 
indirect  taxation  as an essential  element  in progress 
towards  economic  and  monetary  union.  In view  of 
the importance  of tobacco  as a source  of revenue 
and of the  present  obstacles  to intra-Community 
trade  in manufactured  tobacco,  harmonization  of 
taxes  which  affect  the consumption  of manufactured 
tobacco  is of particular  importance. 
1.1.1.  The  Committee  is concerned  that  no 
progress  has  been  made  towards  the  harmonization 
of the structure  of the excise  duties  on manufactured 
tobacco,  beyond,the  provisions  of the initial  Council 
Directive  72/464/EEC  of  19  December  1972. 
Although  this  Directive  laid  down  certain  broad 
principles  for  the  harmonization  of these  excise 
duties,  the  only  practical  effect  of the  Directive  so 
far has been  in the implementation  of a very  limited 
first stage  in the  harmonization  of the  structure  of 
the excise  duties  on cigarettes. 
1.1.2.  Whilst  acknowledging  that  further  progress 
has been  hampered  by the fact  that  widely  different 
views  are held  concerning  the desirable  structure  of 
the excise  duties  on  manufactured  tobacco,  the 
Economic  and  Social  Committee,  as well  as the 
European  Parliament,  have  repeatedly  urged  more 
rapid  progress  in the harmonization  programme. 
1.1.3.  The  first  phase  of  the  harmonization 
programme  for  cigarettes,  which  commenced  on 
1 July  1973,  was,  in accordance  with  the  1972 
Directive,  to be followed  by a second  stage  com-
mencing  on 1 July  1975.  In fact  the  first  stage  of 
harmonization  has  already  been  twice  extended  by 
a further  year,  thus  postponing  the  implementation 
of the  second  stage  until  1 July  1977.  In principle, 
the Committee  therefore  welcomes  the present  draft 
Directive  which  proposes  special  criteria  for  the 
second  phase  of harmonization  for cigarettes. 
1.1.4.  The  Committee  is however  dismayed  that 
a Council  Directive  on  the  classification  and 
definition  of harmonized  fiscal  product  groups  of 
manufactured  tobacco,  proposals  for  which  have 
been  before  the Council  since  22 March  1974,  has 
still not  been  adopted.  The  Committee  again  urges 
the Council  to act on this  proposal,  having  regard 
to the opinions  expressed  by the Committee  in July 
1974  and  the Parliament  in December  1974.  Pending 
such  action,  no progress  whatever  is being  made 
towards  the  harmonization  of the  excise  duties  on 
manufactured  tobacco  products,  other  than 
cigarettes. 1.2. In  reviewing  the  proposals  for  the  second 
stage  of harmonization  of the  taxation  structure  on 
cigarettes,  contained  in the draft  Directive,  the Com-
mittee  has had  regard  to the likely  impact  of changes 
in the  taxation  structure  upon  employment,  upon 
revenue,  and  upon  the range  and  level  of retail  prices 
in the various  Member  States.  Indeed  the Committee 
is firmly  of the  view  that  considerations  of social 
as well  as'  of economic  justice  are  all important 
and must  be given  full  weight  in the  proposals  for 
harmonization,  not  only  at this  stage  but  also 
throughout  subsequent  stages  in the  harmonization 
programme.  In this  connection,  and  notwithstanding 
the common  agricultural  policy  for raw  tobacco,  the 
Committee  also  recognized  the  understandable 
interest  of the Community  growers  of tobacco  in the 
fiscal  harmonization  programme. 
1.2.1.  The  Committee  nevertheless  also  takes  into 
account  that  the primary  objective  of harmonization, 
laid down  in the  Treaty  of Rome,  is to create 
conditions  of undistorted  competition  within  the 
Community  as a single  domestic  market,  and  that 
the possibility  of greater  inter-penetration  of the 
national  markets  of the  Member  States  is to be 
assured  as a consequence  of the  achievement  of 
undistorted  competition  in the  Community  market 
as a whole. 
The Committee  regrets  the  fact  that  the  present 
draft  Directive  only  contains  proposals  with  respect 
to cigarettes  and  does  not  also  cover  cigarette 
tobacco.  It considers  it important  that  similar 
proposals  for  cigarette  tobacco  are  made  without 
deilay  so as to avoid  distortion  of competition. 
1.2.2.  The  Committee  considers  that  the minimum 
changes  in the  taxation  structure  of the  Member 
States  which  are  proposed  for  implementation  at 
the commencement  of the  second  phase  need  not 
create  undue  disruption  of employment  and  market 
conditions. 
1.2.3.  The  Committee  is therefore  of the  opinion 
that the Articles  of the draft  Directive  can  be agreed 
to, subject  to the following  specific  observations,  and 
to further  general  observations  concerning  future 
proposals  by the  Commission  for  further  stages  in 
harmonization. 
2. Specific  observations 
2.1. The  Committee  notes  that  a proportional 
excise  duty  and  the  incidence  of VAT  on  retail 
30. 8. 76 Official  Journal  of the European  Communities No C 204/3 
prices  (both  of which  are  fixed  percentages  of retail 
prices),  have  precisely  the  same  effect  of multiplying 
out, at retail  price  level,  any  underlying  differences 
in manufacturers'  pre-tax  selling  prices.  The  Com-
mittee  therefore  welcomes  the  proposal  under 
Article  3 of the  draft  Directive  that  the  minimum 
and maximum  specific  excise  duty  during  the second 
phase  of harmonization  should  be determined  by 
reference  to the  total  tax  burden  resulting  from  the 
aggregation  of excise  duties  and  of the  VAT  levied 
on the  most  popular  class.  Unless  this  proposal  is 
adopted  as part  of the  criteria  for  the second  phase, 
the imposition  of a minimum  specific  ratio  of total 
excise  alone  could  be thwarted,  pending  the  Com-
munity  harmonization  of  VAT  rates,  by simple 
transfer  from  excise  to VAT  forms  of taxation.  The 
Committee  also  welcomes  the  proposal  under 
Article  1 of the  draft  Directive  that  the  same  pro-
cedure  should  be adopted  at the final  stage. 1972  Directive  until  31 December  1977,  which  was 
granted  to these  Member  States  under  Article  12 (1) 
of the original  Directive. 
2.4.1.  The  reason  for  this  derogation  was  that  the 
traditional  structure  of excise  duties  on cigarettes  in 
the United  Kingdom  and  Ireland  was  totally 
different  from  that  of the  other  Member  States, 
namely  in the  form  of a specific  amount  per  pound 
weight  of unmanufactured  tobacco  used  in the 
manufacture  of cigarettes.  Under  the  terms  of the 
1972  Directive,  these  two  Member  States  are  thus 
required  to abandon  totally  all weight-related  excise 
on cigarettes  by 1 January  1978  and  by then  to adopt 
the Community  structure  of  end-product  excise 
taxation  comprising  only  a unit  specific  element 
(i.e. a fixed  amount  per  cigarette)  and  a proportional 
element  (i.e.  a fixed  percentage  of the  maximum 
retail  price). 
2.2. The  Committee  notes  that  the  proposed  new 
Article  11 (1)  of the  1972  Directive  (by  virtue  of 
Article  3 of the  draft  Directive)  envisages  that  the 
second  phase  of  harmonization  should  cover  a 
3V2-year  period.  The  Committee  considers  that  this 
period  should  not  be reduced  in the  event  of any 
delay  in the adoption  of the draft  Directive,  whereby 
the second  phase  criteria  might  be  initially 
implemented  later  than  1 July  1977. 
2.3. The  Committee  notes  that  the  special  criteria 
applicable  to the  first  phase  of harmonization  under 
Article  8 (2)  of the  1972  Directive  are  'without 
prejudice  to the  solution  to be  finally  adopted 
regarding  the  ratio  between  the  specific  component 
and the  proportional  component'.  The  Committee 
is of the  opinion  that  the  criteria  for  the  second 
phase  included  in the  new  Article  12 (2) of the  1972 
Directive  (as  per  Article  3 of the  draft  Directive), 
which  would  replace  the  first  phase  criteria,  should 
likewise  be 'without  prejudice  to the  solution  to be 
finally  adopted  regarding  the  ratio  between  the 
specific  component  and  the  proportional  components 
of the  total  tax  burden'.  This  would  be in keeping 
with  the  undertaking  expressed  in Article  1 of the 
draft  Directive  that  the  final  structure  of 
harmonization  shall  'reflect  fairly  the  differences  in 
the manufacturers'  delivery  prices'. 
2.4. The  Committee  notes  that  two  of the Member 
States,  namely  the United  Kingdom  and  Ireland,  have 
not yet implemented  the first  stages  of harmonization 
for cigarettes,  by virtue  of the  derogation  from  the 2.4.2.  The  phasing  criteria  for  the  Community 
programme  of harmonization  are  designed  to enable 
the other  Member  States  to make  only  gradual 
changes  in their  traditional  excise  structures,  so as 
to avoid  serious  dislocation  of markets.  It is apparent 
that the  degree  of change  which  will  be required 
by 1 January  1978  in the  seven  Member  States, 
whose  traditional  system  of excise  was  either  unit 
specific  or proportional,  will  be far less  in its effects 
than  the  changes  in the  United  Kingdom  and  Ireland 
which  are  already  required  under  the  first  Directive, 
whereby  these  Member  States  are  to abandon  all 
weight-related  duties  by this  date.  Moreover,  there 
are clear  indications  that  the  full  adoption  of the 
Community  system  of excise  by  1 January  1978 
will lead  to serious  dislocation  of the  markets  of 
these  Member  States,  especially  of  the  United 
Kingdom  market. 
2.4.3.  The  Committee  notes  that  the  United 
Kingdom  has  recently  initiated  legislation  to intro-
duce  a measure  of proportional  excise  duty  in part 
substitution  for  the  specific  duty  per  pound  weight 
of unmanufactured  tobacco.  The  Committee  greatly 
welcomes  this  initiative  towards  alignment  with  the 
Community  system  of taxation  on cigarettes. 
2.4.4.  However,  the  Committee  recognizes  the 
magnitude  of the  economic  and  social  problems 
associated  with  the  total  abandonment  of weight-
related  duties  by  1 January  1978  in the  United 
Kingdom  and  in Ireland.  For  this  reason,  the  Com-
mittee  urges  the  Commission  to consider  proposals 
for special  phasing  arrangements  in these  two  Mem-
No C 204/4 Official  Journal  of the European  Communities 30. 8. 76 
ber States,  whereby  a weight-based  system  of excise, 
possibly  on an end-product  basis,  could  be gradually 
replaced  by  a mixed  specific/proportional  system 
during  the  term  of the  proposed  second  phase  of 
harmonization  beyond  1 January  1978.  The  Com-
mittee  is of the  opinion  that  such  special  arrange-
ments  could  go  a long  way  to averting  serious 
dislocation  of markets  in these  Member  States;  at 
the same  time  such  special  arrangements  need  not 
delay  in any  way  the achievement  of the final  phase 
of structural  harmonization  of taxation  on cigarettes 
simultaneously  throughout  the nine  Member  States. 
3. General  observations industry  in the  different  countries  and  upon  an 
equitable  choice  of taxation  structure  in the  final 
phase  of the  present  programme  of harmonization. 
The Committee  urges  the  Commission  to fully 
consider  the  implications  of such  practices  upon 
conditions  of competition  in the  Community  as a 
unified  market,  so as to make  proposals  for  their 
harmonization  within  a Community  framework, 
concurrently  with  its proposals  for  the  final  phase 
of harmonization  of the taxation  structure. 
3.2.2.  If  this  is not  done,  harmonization  in the 
fiscal  field  alone  could  aggravate  rather  than  reduce 
distortion  in conditions  of competition  in the Com-
munity  as a whole. 
3.1. The  Committee  regrets  that  the Commission's 
present  proposals  are confined  to special  criteria  for 
the second  phase  of harmonization  on cigarettes  and 
that no proposal  is yet  being  made  for  the  final 
stage.  Although  it is desirable  to review  the  effects 
of each  stage  of harmonization  before  envisaging 
subsequent  progressive  stages,  the  Committee  is of 
the opinion  that  it is equally  important  that  an early 
decision  should  be made  on the final  structure.  Such 
an early  decision  is vital  to the planning  needs  of the 
cigarette  industry  and  of tobacco  growers  throughout 
the Community. 
3.1.1.  The  Committee  therefore  urges  the  Com-
mission  to make  proposals  for the final  structure  of 
harmonization  of indirect  taxation  on cigarettes  as 
early  as possible  in the  course  of the  second  phase 
of harmonization. 
3.2. The  Committee  considers  that  considerable 
further  study  is warranted  before  proposals  for  an 
equitable  final  structure  of taxation  on cigarettes  can 
be formulated.  Such  a study  should  include  a full 
evaluation  of the  social  and  economic  effects  not 
only of the  fiscal  structure  in isolation,  but  also  of 
the many  other  obstacles  to conditions  of equal  and 
fair competition  if the  Community  market  is to 
acquire  the  characteristics  of a single  domestic 
market. 
3.2.1.  Of  particular  note  are  widely  varying 
practices  between  Member  States  concerning  funding 
arrangements  by way  of extended  tax  credit  and 
other  current  or potential  subsidized  sources  of 
capital.  Clearly,  such  arrangements  have  a major 
bearing  upon  the  cost  structure  of the  cigarette 3.3. Recognizing  the  primary  objective  of 
harmonization  as noted  in paragraph  1.2.1  above, 
the Committee  notes  that  the  final  Community 
structure  of taxation  should  be determined  on the 
basis  of a judgement  in equity  in such  a way,  as 
stated  in both  Article  4 (3) of the  1972  Directive 
and in its amendment  proposed  in the draft  Directive, 
that the  range  of retail  selling  prices  reflects  fairly 
the difference  in the  manufacturers'  delivery  (i.e. 
pre-tax)  prices. 
3.3.1.  Article  4 (3)  of the  1972  Directive  also 
provided  that  the  final  stage  of harmonization  of 
structures  for  cigarettes  should  establish  the  same 
ratio  in all Member  States  between  the specific  and 
the proportional  elements  of the  excise  duty  alone. 
The Commission  has  departed  from  this  approach 
in Article  1 of the  draft  Directive  and,  as noted  in 
paragraph  2.1  above,  the  Committee  considers  this 
proposal  apposite.  Nevertheless,  the  Committee 
further  urges  the  Commission  to  conduct  an 
examination  of all relevant  approaches  to the  final 
phase  of this  harmonization  programme,  even  if 
some  of these  may  entail  a further  amendment  of 
the original  concept  as regards  the form  of the final 
stage. 
3.3.2.  In  this  connection,  the  Committee  noted 
that a specific  excise  duty  (i.e.  a fixed  amount  per 
cigarette)  merely  determines  the level  of retail  prices 
over and  above  the  pre-tax  manufacturers'  price 
and trade  margin.  Differences  in manufacturers'  pre-
tax delivery  prices  are not enlarged  by a specific  duty 
at retail  level.  On the  other  hand,  proportional  (or 
ad valorem)  taxes  based  on the  final  retail  price 
multiply  differences  in the  manufacturers'  pre-tax 
selling  prices  into  larger  differences  in retail  prices. 
Trade  margins,  which  are  generally  expressed  as 
a percentage  of retail  prices,  further  add  to this 
30. 8. 76 Official  Journal  of the European  Communities No C 204/5 
multiplication  effect.  It was  also  noted  that  as the 
incidence  of the  proportional  elements  of the  retail 
price  structure  (i.e.  proportional  taxation  plus  trade 
percentage  margin)  increases  above  50%  of the  total 
retail  price,  the increments  in the multiplication  effect 
rise dramatically  faster  than  each  successive  increase 
in the  incidence  of the  proportional  elements  of the 
retail  price. 
3.3.3.  Because  of this  multiplication  effect,  the 
conditions  of competition  induced  by the  taxation 
system  are  thus  determined  by the  rates  of pro-
portional  taxation  on retail  prices  and  not  by the 
ratio  relationship  between  the  incidence  of specific 
and proportional  taxation.  In  fact,  significant 
differences  exist  between  Member  States  in  the 
incidence  of the  total  taxation  burden  on cigarettes. 
The achievement  of a fixed  relationship  between  the 
specific  duty  and  proportional  taxes  on the  most 
popular  price  class  in all Member  States,  which  is 
envisaged  as the final  stage  of the  harmonization  of 
structure  under  the  1972  Directive,  would  therefore 
only  go some  way  towards,  but  would  still  fall  short 
of, achieving  uniform  conditions  of  competition within  the Community.  This  would  be achieved  only 
when  a subsequent  harmonization  programme  of the 
rates  of taxation  on cigarettes  would  also  have  been 
completed  and  when  other  distortions  of competition 
will have  been  removed.  Obviously,  the  impact  of 
such  a harmonization  programme  upon  government 
revenues  and  expenditure,  and  the  consequential 
social  policy  effects,  must  be carefully  examined. 
3.3.4.  The  Committee  suggests  that  the  Com-
mission's  examination  of relevant  approaches  to the 
final  stage  of this  harmonization  programme  might 
include  an examination  of proposals,  which  might 
fix the  incidence  (i.e.  the  rates)  of proportional 
taxation  on maximum  retail  prices,  rather  than  the 
ratio  relationship  between  the  specific  and  the 
proportional  elements  of  taxation.  This  would 
involve  a departure  from  the  approach  envisaged  in 
Article  1 of the  draft  Directive  but  it would  ensure 
the earlier  realization  of uniform  conditions  of 
competition  in the  Community  as a unified  market, 
leaving  Member  States  free  to levy  a variable  specific 
excise  duty  until  such  time  as harmonization  of 
excise  rates  overall  can also  be agreed  upon. 
Done  at Brussels,  30 June  1976. 
The Chairman 
of the Economic  and  Social  Committee 
Henri  CANONGE 
Opinion  on the  proposal  for a Directive  coordinating  the conditions  for the admission 
of securities  to official  stock  exchange  quotation 
The text  referred  to the Committee  has  been  published  in Official  Journal  No C 56 of 
10 March  1976,  page  2. 
A. LEGAL  BASIS  FOR  THE  OPINION 
On 28  January  1976  the  Council  referred  the  abovementioned  proposal  to the 
Economic  and  Social  Committee  in accordance  with  Articles  54 and  198  of the Treaty 
establishing  the European  Economic  Community.