Opinion of the Economic and Social Committee on the "Proposal for a Council Directive amending Directive 92/79/EEC, Directive 92/80/EEC and Directive 95/59/EC as regards the structure and rates of excise duty applied on manufactured tobacco"

(2002/C 36/22)

On 5 April 2001, the Council decided to consult the Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 24 September 2001. The rapporteur was Mr Bento Gonçalves.

At its 385th plenary session of 17 and 18 October 2001 (meeting of 18 October), the Economic and Social Committee adopted the following opinion by 87 votes to 30 with 15 abstentions.

1. Introduction

1.1. The existing regime (Directive 95/59/EEC) as regards the structure and rates of excise duty applied on manufactured tobacco dates from 1 January 1993. When this regime was being drawn up, the Commission was in favour of a total harmonisation of rates of excise duty on manufactured tobacco. The Council, however, was not in agreement and in the end only harmonised tax structures and set minimum rates.

1.2. With regard to cigarettes, the structure of excise duty as defined at European level requires the Member States to charge both a proportional component (ad valorem), calculated on the basis of the maximum retail selling price, and a specific component (per item). Together these two components must represent at least 57 % of the retail selling price for cigarettes of the price category most in demand. (Excise duty must fall within the range 5 % to 55 % of the total tax burden, inclusive of VAT.)

1.3. With regard to manufactured tobacco other than cigarettes, i.e. cigars, cigarillos, hand-rolling tobacco, etc., the Member States have a choice of three types of excise duty structures: proportional excise duty, specific excise duty or a combined system.

1.3.1. Directive 92/80/EEC lays down minimum levels for the above products: 5 % of the retail selling price for cigars and cigarillos (or EUR 10 per 1000 items); 30 % or EUR 25 per kilogram for fine-cut tobacco (intended for rolling); and 20 % or EUR 19 per kilogram for other smoking tobaccos.

1.4. Directive 92/79/EEC provides that every three years the Commission must present a report and, where appropriate, proposals for revision of the Directives to the Council, on the basis of which the Council will examine the minimum excise duty and the structure of excise duty currently laid down in Directive 95/59/EEC. If the Council intends to adopt any of the amendments, it must act unanimously after consulting the European Parliament.

1.5. On the basis of this third report, which follows on from its 1995 and 1998 reports, and in response to a request from some of the Member States, the Commission proposes a more in-depth review of the rates and structure of excise duty on cigarettes and other manufactured tobacco.

2. Commission proposal

2.1. The Commission report notes that, despite the current rules governing the structure of excise duty, tobacco product prices vary considerably between some Member States. The Commission suggests a figure of 400 % for the tax return on the category of cigarette most in demand.

2.1.1. The Commission believes its proposals are justified as they will help resolve the malfunctioning of the internal market, reduce fraud and improve the health of European citizens.

2.2. To reduce distortions in the functioning of the internal market caused by this situation, the Commission proposal suggests greater convergence or harmonisation of tax and, therefore, of the excise duty regime.

2.2.1. In addition to the existing regime for excise duty on cigarettes, the Commission proposes introducing a fixed minimum amount of EUR 70 per 1000 cigarettes for the categories most in demand. The Member States would therefore have to meet two requirements: the 57 % minimum incidence rule and EUR 70 per 1000 items if the amount of excise duty is less than this figure.

2.2.1.1. The Commission proposes, however, that Member States that levy tax of at least EUR 100 per 1000 cigarettes should not be required to comply with this 57 % rule.

2.2.2. Finally, the Commission questions the fact that until now the Member States could levy a minimum excise duty, regardless of price, on "bottom-of-the-range" cigarettes, provided that this excise duty did not represent more than 90 % of the excise duty on cigarettes in the price category most in demand.

2.2.2.1. The Commission proposal amends this 90 % rule, on the one remaining condition that the minimum excise duty levied by the Member States on these "low-cost" products must not exceed the excise levied on the price category most in demand.

2.2.3. With regard to fine-cut tobacco, the Commission proposes gradually aligning tax on hand-rolling tobacco on the rate for cigarettes. This would take the minimum level from 30 % to 39 %, or from EUR 25 to EUR 34 per kilo, by 2004.

2.3. With regard to cigars and cigarillos, the Commission proposes redefining these products to prevent cigarettes being sold as such and therefore taxed at a preferential rate instead of at the rate for cigarettes.

2.4. Finally, the Commission proposes extending the period for examining the rates and structure of excise duty from three to four years so that the functioning of the internal market can be assessed more effectively.

3. General comments

3.1. The Committee regrets that the Commission has not considered the wider impact its proposals could have on the whole tobacco industry (e.g. unlike cigarette and other manufactured tobacco producers, European tobacco producers were not consulted). While the Committee accepts that the Commission's objectives were well-founded, it doubts that these objectives - whether relating to the functioning of the internal market, fraud reduction or consumers' health, etc. - can really be achieved.

3.2 The Committee points out that the Member States are still responsible for tax policy and the European Community's involvement does not go beyond establishing the necessary conditions for the free movement of goods for the completion of the internal market. However, this internal market, which removes barriers to the free movement of goods, persons, services and capital between the Member States, is already in operation.

3.2.1. It is unreasonable to think that harmonising excise duty upwards will eliminate fraud. Intra-Community fraud (which does not really constitute fraud, as excise duty is still paid to a Member State) will, admittedly, be less "attractive", but unfortunately there is no doubt that extra-Community fraud - i.e. originating from CEECs and other parts of the world, and where no excise duty is paid - will be more common and more dangerous, as products that are illegal or unsuitable for consumption could enter the European Union by this route.

3.2.1.1. The Committee believes such fraud must be stamped out by checks carried out by the competent services in the Member States concerned (in cooperation with the services of the European Commission), in particular by means of the cooperation procedures established by the monitoring authorities of the various countries.

3.2.2. The Commission report also refers to cross-border transactions and the subsequent loss of tax revenue for some Member States. Cross-border transactions are, however, completely legal (providing they do not exceed the quantities laid down in Directive 92/12/EEC) and are not an internal market issue but rather a sign that the market is dynamic and functions well(1).

3.2.2.1. A number of studies on this issue clearly show that cross-border transactions cannot be attributed solely to possible tax differences between two Member States as other factors also come into play. This phenomenon can be found in many other sectors of the economy, and it is generally accepted that it benefits the consumer financially.

3.3. The Commission proposes introducing a flat-rate duty of EUR 70 per 1000 cigarettes for the category most in demand in addition to the existing minimum percentage rate of duty. The Committee fears that this will entail excessive price increases in some Member States with consequences not foreseen by the Commission.

3.3.1. The Committee highlights two principles defended by the Commission when cigarette tax harmonisation measures were adopted in 1972(2):

- the structure of excise duty must allow the range of retail selling prices to reflect differences in pre-tax prices fairly to prevent distortions of competition;

- the adjustment efforts required of Member States must be comparable.

3.3.1.1. However, the Commission's proposals would require countries that prefer the proportional component (in general producer countries with lower pre-tax prices) to make much greater efforts to adjust than countries that prefer the specific component; moreover differences in pre-tax prices would no longer be reflected fairly. (Of the countries concerned, only Portugal levies a specific duty considerably higher than the obligatory minimum rate of 5 %)(3).

3.3.1.2. This would have a considerable impact on prices which, according to the Commission, could be of the order of:

- + 1 % for Luxembourg;

- + 16 % for Portugal;

- + 18 % for Greece;

- + 18 % for Italy;

- + 30 % for Spain (other studies suggest 38 %).

The impact on price levels in the CEECs is likely to be even higher, in most cases reaching rates of around 150-200 %. Considerable problems could therefore be expected in implementing this new rule.

3.3.1.3. The Committee therefore asks what led the Commission to adopt this sudden U-turn and introduce a more specific policy which could be tantamount to a compulsory system for bringing prices closer together. Although the Commission states that differences in gross domestic product expressed in purchasing power parity terms (75 %) between Member States bear no relation to differences in the price of cigarettes (over 400 %), it is quite justified to say that the Commission's proposals would lead to price levels which are incompatible with the standard of living in some countries.

3.3.2. European producers and downstream industry as a whole would be hard hit by this new situation, and this in turn would have serious consequences for employment in these regions, in most cases already underprivileged areas of southern Europe.

3.3.2.1. Traditional European industries that manufacture local products at moderate prices would also be at a disadvantage compared to large international companies which, thanks to brand image and publicity, occupy an up-market niche. As taxes rise, consumers will choose either a very low-price product, or a top-of-the-range product that costs only slightly more than local products which were previously available at a moderate price.

3.4. The Committee also has doubts concerning the potential impact of these proposals on consumer health. Besides, no research has so far shown that price increases lead to a fall in tobacco consumption.

3.4.1. Other proposals regarding the labelling of cigarettes and other tobacco products already respond to consumer health concerns and will enter into force in the near future(4).

3.4.2. Increasing tax on "low-cost" products, hand-rolling tobacco (which previously was an alternative for consumers), and products that fall, perhaps wrongly, into the category of cigars and cigarillos, will lead to an increase in extra-Community fraud and will therefore make it easier for products which are potentially harmful to enter the European Union. The levelling of prices would remove the attractiveness of certain substitute products, which would be a regrettable retrograde step for EU competition policy. It would in effect penalise only the least affluent consumers.

3.4.3. As the Commission proposals will not affect all operators and cigarette manufacturers in all countries equally, as only cigarettes of the category most in demand are affected, a price war is to be feared which is unlikely to benefit either public health policies or the states' tax revenues.

3.5. The Committee also wishes to express its concern regarding the potential consequences of the accession of applicant states on their national cigarette markets and the single market as it is today. The transitional measures mentioned in the Commission report are unlikely to resolve this problem.

3.6. The Commission, in conjunction with the Member States, should propose effective measures against the black market in tobacco, since it is responsible for a considerable loss of tax revenue and distortions in the market. The Commission report makes no reference to this important issue.

3.7. Finally, the Committee agrees with the Commission that a review every four years instead of every three will make it easier to assess the functioning of the internal market more effectively.

4. Conclusions

4.1. The Committee again points out that it essentially shares the concerns (i.e. reduction of fraud and consumer health protection) which the Commission is endeavouring to resolve. However, discussions by the Committee suggest that the Commission's proposals will not have the impact expected, and the proposed instrument is therefore not suitable.

4.2. Neither consumers, producers, the industry (in terms of employment), retailers or the Member States will benefit at all from this proposal.

4.3. The Committee notes that the Commission proposal is likely to accentuate rather than reduce the discrepancies between the rates of duty levied in the different Member States, and this runs counter to harmonisation.

4.4. Finally, according to the Commission report, the Member States gave the Commission a mandate to write a report on excise duty and special taxes, which, "in addition to tobacco, dealt with alcoholic beverages and mineral oils"(5). The Committee therefore fails to understand why only a proposal for tobacco has been drawn up.

4.5. The Committee therefore believes that until the harmonisation of excise duty on tobacco is included in the general tax package, and until the Council is prepared to move ahead with this dossier, the current situation cannot change. The global approach to products and the various tax components which is needed should take account of VAT discrepancies which are greater than discrepancies in excise duty.

Brussels, 18 October 2001.

The President

of the Economic and Social Committee

Göke Frerichs

(1) The Court of Justice of the European Communities also reiterated this principle in its judgement of 2 April 1998 (Case C-296/95).

(2) EC Directives 72/464 and 77/805.

(3) Annex C of the Commission report: EL 5.09 %, E 5 %, I 5 %, L 15 % and P 41.6 %.

(4) COM(1999) 594 final.

(5) COM(2001) 133 final, Vol. 1, Chapter II, point 2.1, p. 7.