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

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Commission report on the rates and structure of excise duties on manufactured tobacco

This proposal for a directive suggests a number of important amendments to existing Community legislation on the taxation of manufactured tobacco, while keeping the main pillars of the acquis unchanged rather than establishing a new system. The proposed amendments are the result of an in-depth examination by the Commission of the rates and structure of excise duty on tobacco products carried out in response to a request from a large number of Member States in a statement entered in the minutes when Council Directive 1999/81/EC was adopted. [1]

[1] Council Directive 1999/81/EC of 29 July 1999 amending Directive 92/79/EEC on the approximation of taxes on cigarettes, Directive 92/80/EEC on the approximation of taxes on manufactured tobacco other than cigarettes and Directive 95/59/EC on taxes other than turnover taxes which affect the consumption of manufactured tobacco (OJ L 211, 11.8.99, p. 47).

The review was conducted in accordance with Article 4 of Council Directive 92/79/EEC of 19 October 1992 on the approximation of taxes on cigarettes [2] and Article 4 of Council Directive 92/80/EEC of 19 October 1992 on the approximation of taxes on manufactured tobacco other than cigarettes, [3] both amended by Directive 1999/81/EC, which state that the rates and structure of excise duties are to be reviewed at three-yearly intervals. The conclusions of this review are set out in the attached Commission report, which takes into account the smooth operation of the single market, the real value of excise-duty rates and the wider objectives of the Treaty.

[2] Council Directive 92/79/EEC of 19 October 1992 on the approximation of taxes on cigarettes (OJ L 316, 31.10.92, p. 8).

[3] Council Directive of 19 October 1992 on the approximation of taxes on manufactured tobacco other than cigarettes (OJ L 316, 31.10.1992, p. 10).

The first review, in 1995, [4] showed that there was no need for any short-term adjustments to the structure and rates of excise duty on manufactured tobacco to ensure the smooth operation of the single market. It identified a number of issues where technical changes might be justified, but concluded that more detailed analysis and consultation with interested parties was necessary before final decisions were taken.

[4] COM(95)285 final, 13.09.95.

The second report, presented in May 1998, [5] examined the necessary technical amendments, which were mainly adjustments affecting the overall incidence of the minimum duty for cigarettes, but keeping the structures and rates of excise duty unchanged. This review was accompanied by a proposal for a directive amending the existing tobacco legislation.

[5] COM(98)320 final, 15.05.98.

2. Operation of the single market

An analysis of the changes of prices and excise rates for tobacco products in the European Union shows that there are still considerable differences between Member States. When manufacturers determine the price level of their products in a given Member State, they will take account of several factors, including production costs, local purchasing power, the competitive position of their product on the market and the level of taxation. It is impossible to determine the exact impact of each of these factors on the final price; differences in excise duty undoubtedly contribute to price differences, but they are not the only explanation.

During the consultation, most Member States seemed to be in favour of the 57% incidence rule for cigarettes, [6] though some drew attention to its shortcomings and pointed out that application of a minimum rate alone would not lead to further approximation.

[6] "The incidence [of minimum excise duty] shall be ... 57% of the retail selling price (inclusive of all taxes) for cigarettes of the price category most in demand."

A way therefore has to be found that will increase the level of tax convergence within the EU. A valid alternative to the existing rule would be to introduce a fixed minimum amount expressed in euros in addition to the minimum excise incidence of 57 % in order to guarantee a minimum level of excise duties on cigarettes in all Member States. Member States' excise duties would have to meet two requirements: the 57% incidence rule and a minimum of EUR 70 per 1000 cigarettes of the price category most in demand. Member States which already charge a high level of excise duty would be allowed greater leeway in setting the rates. No change is needed in the existing limits of 5% and 55% of the total tax burden for the specific component of the excise duty. To help Member States deal with price wars or a drastic increase in supply at the lower price segments of the cigarette market, they will be allowed greater flexibility in levying a minimum excise duty on cigarettes.

Any harmonisation of the structures of excise duties must be such as to prevent distortions of competition between different categories of manufactured tobacco belonging to the same group and hence ensure the opening of the domestic markets of the Member States. To achieve this, harmonised product definitions have been laid down, which have to be continually reviewed in order to take account of changes in the product offers. The Commission considers that an amendment is necessary in the definition of one particular type of product, with characteristics of both a cigar and a cigarette. A gradual alignment of the minimum rates for fine-cut tobacco for the rolling of cigarettes on the minimum rate for cigarettes, spread over 3 years, is also necessary, since there is no good reason for treating them differently from a health point of view.

3. Real value of excise duties

The review also looked at the real value of excise-duty rates. National administrations generally take inflation into account when drafting their budgets. It can be assumed that, all things being equal, they will usually raise excise-duty rates in line with inflation. Since the minimum excise duty on cigarettes is expressed as a percentage of the retail selling price, it tracks inflation automatically and so does not require any adjustment. As Member States can also opt for specific excise duties on cigars, cigarillos, fine-cut tobacco and other smoking tobacco, however, the minimum amounts need to be adjusted in line with inflation in order to maintain the original ratio between the specific and the ad valorem components of the duty.

4. Wider objectives of the Treaty

The Treaty clearly states that it is the Community's responsibility to adopt measures with the aim of establishing the internal market, including provisions for the harmonisation of legislation concerning excise duties to the extent that such harmonisation is necessary to ensure the establishment and functioning of that market. Excise duty is primarily an instrument for generating revenue at national level, but policy-making in this area has to take into account the wider objectives of the Treaty and try and reconcile these with improvements in the operation of the internal market. Given the characteristics of manufactured tobacco products, particular attention has therefore to be paid to the health-protection aspects and to the relationship between such protection and the price of the products.

A minimum level of taxation for tobacco products within the EU is necessary. A high level of taxation, accompanied by other measures for reducing consumption, will have an impact on consumer behaviour, but has to be seen in the context of smuggling as well.

The Commission therefore considers it necessary to establish a reasonable minimum level of taxation both for cigarettes and for fine-cut tobacco intended for the rolling of cigarettes, taking into account inter alia the functioning of the internal market and consumer health protection.

5. Frequency of reviews

An in-depth examination of the operation of the single market and the rates and structure of different tobacco products was carried out for the purpose of this review and the Commission feels a three-year period for the next review is too short to provide the proper perspective for assessing changes in Member States' legislation. A four-year period would be more appropriate.

Explanation of the Articles

Article 1

Article 1 amends certain provisions of Directive 92/79/EEC on the approximation of taxes on cigarettes.

Paragraph 1

The existing Article 2 is amended to ensure greater convergence of the tax burden within the EU and a minimum level of excise duties on cigarettes in all Member States. To achieve this a fixed minimum amount expressed in euros in addition to the minimum excise incidence of 57% of the retail selling price for cigarettes of the price category most in demand is proposed.

This means the minimum incidence of excise duties in the Member States would have to respect two requirements: 57% of the retail price (all taxes included) and a minimum of EUR 70 per 1000 cigarettes for cigarettes of the price category most in demand. The Commission believes that a minimum fixed amount of this kind should significantly reduce the incentive for smuggling by putting a floor under excise duty. At the moment, Member States which sell cheap cigarettes can meet the 57% requirement but still have a very low incidence of overall excise duty expressed in euros.

The 57% rule and the fixed amount must be respected for the most popular price category and the level of taxation thus established is then applied to all categories of cigarettes.

Since one of the Commission's aims is to bring about greater approximation of the excise burden on cigarettes, however, an escape clause is needed to ensure that the higher-taxing Member States do not have to keep raising excise duty in order to comply with the 57% rule. Member States applying an effective excise charge of at least EUR 100 per 1000 cigarettes for the category most in demand will not therefore be required to comply with this 57% rule.

Paragraph 2

Article 4 of Directive 92/79/EEC currently requires the Commission to examine the structure and rates of excise duty on cigarettes every three years.

An in-depth examination of the operation of the single market and the rates and structure of different tobacco products was carried out for the purposes of this review. The Commission believes the current three-year period is too short to provide the proper perspective for assessing changes in Member States' legislation that will result from the application of this Directive. A four-year period would therefore be more appropriate.

Taking into account the time required for discussions in the Council, the European Parliament and the Economic and Social Committee, it would be logical to provide that the four-year period for the next review should run from the time the discussions in the Council on the previous review are finalised. It goes without saying that the Commission can make proposals on its own initiative at any time before the end of the four-year period where it considers this necessary or where account needs to be taken of changes on the tobacco market.

The figures of EUR 70 and EUR 100 have to be seen in the context of the 57% minimum incidence, and the Commission will review them whenever it examines the rates and structures of excise duties under Article 4 of Directive 92/79/EEC in order to maintain the original ratio between the fixed sum and the 57% incidence.

Article 2

Article 2 amends certain provisions of Directive 92/80/EEC on the approximation of taxes on manufactured tobacco other than cigarettes.

Paragraph 1

This inserts a new subparagraph in Article 3 of the Directive amending the existing provision in two ways, gradually aligning the minimum rates for fine-cut tobacco intended for the rolling of cigarettes on the minimum for cigarettes and adjusting the minimum euro amounts for tobacco products other than cigarettes in line with inflation.

The substantial differences in tax levels among Member States for fine-cut tobacco intended for the rolling of cigarettes, combined with major differences in pre-tax prices, encourage smuggling between neighbouring countries and give rise to distortions in the internal market. There is also a big difference at Community level between the minimum excise incidence for cigarettes of the price category most in demand and the minimum rates of either 30% of the retail selling price or EUR 25 per kilogram for fine-cut tobacco.

The two products have different characteristics: cigarettes are factory-made, while fine-cut tobacco is a semi-finished product used by consumers who roll their own cigarettes and have to buy additional materials for that purpose. On the other hand they are competing in a way, since an increase in the price of cigarettes often results in smokers who can no longer afford the more expensive cigarettes shifting to hand-rolling tobacco. From a health point of view, both products are harmful and in that sense there is little justification for a wide variation in the rates at Community level. Many Member States already maintain a certain ratio between the taxation of fine-cut tobacco and cigarettes even if there is no obligation to do so.

The Commission therefore believes the minimum rate for fine-cut tobacco should be brought more closely into alignment with the 57% rule applying to cigarettes. Given the different characteristics of the two products, an adjustment of the minimum rate for fine-cut rolling tobacco up to two/third of the minimum excise incidence for cigarettes seems reasonable.

That would raise the minimum incidence for fine-cut tobacco from 30% to 39%. Increasing the minimum rate expressed as a specific amount by the same percentage as the ad valorem minimum rate would give a new specific minimum duty of EUR 33. Member States which do not currently maintain such a ratio between their rates for cigarettes and fine-cut tobacco or which set their rates at a very low level will be given the necessary time to adjust to the new minimum rates. The Commission therefore proposes to increase the minimum rates by stages between now and the year 2004 as follows:

-1 January 2001: 30% of the retail selling price inclusive of all taxes or EUR 25 per kilogram

-1 January 2002: 33% of the retail selling price inclusive of all taxes or EUR 28 per kilogram

-1 January 2003: 36% of the retail selling price inclusive of all taxes or EUR 30 per kilogram

-1 January 2004: 39% of the retail selling price inclusive of all taxes or EUR 33 per kilogram.

The Commission also proposes to adjust the specific minimum amounts expressed in euros for tobacco products other than cigarettes in line with inflation, starting from 1 January 2003.

Since the Commission is proposing four-yearly reviews (see Paragraph 2), the specific rates will be increased in line with inflation between 1 January 2001 and 31 December 2002. On the basis of Eurostat data, the rate of inflation can be estimated at around 1.9% a year or 3.8% over the period as a whole. Applying this percentage to the minimum specific rates and rounding up to the next unit gives us the following figures:

-for cigars and cigarillos: EUR 11 at 1 January 2003;

-for fine-cut tobacco intended for the rolling of cigarettes:

-at 1 January 2003: EUR 31;

-at 1 January 2004: EUR 34;

-for other smoking tobacco: EUR 20 at 1 January 2003.

Paragraph 2

Article 4 of Directive 92/80/EEC currently requires the Commission to examine the structure and rates of excise duty on cigarettes every three years.

An in-depth examination of the operation of the single market and the rates and structure of the different tobacco products was carried out for the purposes of this review. The Commission believes the current three-year period is too short to provide the proper perspective for assessing changes in Member States' legislation that will result from the application of this Directive. A four-year period would be more appropriate.

Taking into account the time required for discussions in the Council, the European Parliament and the Economic and Social Committee, it would be logical to provide that the four-year period for the next reviews should run from the time discussions in the Council on the previous review are finalised. It goes without saying that the Commission can make proposals on its own initiative at any time before the end of the four-year period where it considers this necessary or where account needs to be taken of changes on the tobacco market.

Article 3

Article 3 amends certain provisions of Directive 95/59/EC on taxes other than turnover taxes which affect the consumption of manufactured tobacco.

Paragraph 1

Article 3 of Directive 95/59/EC, which defines cigars and cigarillos, needs to be amended to guarantee a fair taxation of a product that exists in fact already for many years and that recently has become more popular. In terms of function, taste, filter and presentation it can be regarded as a cigarette or cigarette substitute, except that it has the colour of a cigar or cigarillo, rather than the white colour of a cigarette, and the wrapper is filled with cut tobacco instead of a threshed blend. The manufacturing process is similar to that for cigarettes. Under the current legislation, the product is taxed in the Member States at the same rate as cigars and cigarillos, which is considerably lower than the rate for cigarettes. This product is not only competing with cigarettes, it is also disturbing the market for cigars and cigarillos. Being cheaper than cigarettes, the product is increasingly attractive to young people.

To avoid these products being taxed at the low rate for cigars and cigarillos instead of the rate for cigarettes, the Commission proposes to amend the definition of cigars and cigarillos in Article 3 of Directive 95/59/EC to be amended to exclude them.

Paragraph 2

This amends Article 16(5) of Directive 95/59/EC to allow more flexibility to Member States wishing to levy a minimum excise duty.

At present, Article 16(5) of Directive 95/59/EC allows Member States to levy a minimum excise duty on cigarettes provided that this does not have the effect of raising the total tax to more than 90% of the total tax on the most popular price category of cigarettes.

This has sometimes proved quite inadequate to deal with circumstances such as a price war or a drastic rise in supply at the lower end of the market, and it would be helpful for the Member States to be able to increase the amount of the minimum excise duty on cigarettes in this category. The amended rule therefore allows Member States to levy a minimum excise duty on cigarettes, provided that the amount does not exceed the excise duty levied on cigarettes belonging to the most popular price category.

2001/0063 (CNS)

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

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 93 thereof,

Having regard to the proposal from the Commission, [7]

[7] OJ C [.], [ ], p. [ ].

Having regard to the opinion of the European Parliament, [8]

[8] OJ C [.], [ ], p. [ ].

Having regard to the opinion of the Economic and Social Committee, [9]

[9] OJ C [ ], [ ], p. [ ].

Whereas:

(1) In accordance with Article 4 of Council Directive 92/79/EEC of 19 October 1992 on the approximation of taxes on cigarettes [10] and Article 4 of Council Directive 92/80/EEC of 19 October 1992 on the approximation of taxes on manufactured tobacco other than cigarettes, [11] an in-depth review of the rates and structure of excise duties on tobacco products has been carried out.

[10] OJ L 316, 31.10.1992, p. 8; Directive as amended by Directive 1999/81/EC (OJ L 211, 11.8.1999, p.47).

[11] OJ L 316, 31.10.1992, p. 10; Directive as amended by Directive 1999/81/EC (OJ L 211, 11.8.1999, p.47).

(2) The Commission's first report on the subject, of 13 September 1995 [12], merely drew attention to certain difficulties encountered in implementing the Directives, without proposing any specific solutions.

[12] Com(95)285final

(3) The Commission's second report of 15 May 1998 [13], examined the necessary technical amendments, which were mainly to do with adjusting the incidence of the overall minimum duty on cigarettes, but kept the structures and rates of duty unchanged. The report, submitted to the Council on 18 May 1998, included a proposal for an amending Directive [14].

[13] Com(98)320final

[14] OJ C 203, 30.6.1998, p. 16

(4) The proposals made by the Commission were largely adopted in Council Directive 1999/81/EC of 29 July 1999 amending Directive 92/79/EEC on the approximation of taxes on cigarettes, Directive 92/80/EEC on the approximation of taxes on manufactured tobacco other than cigarettes and Directive 95/59/EC on taxes other than turnover taxes which affect the consumption of manufactured tobacco.

(5) An analysis of the changes of prices and excise rates for tobacco products in the Community shows that there are still considerable differences between Member States which may disturb the operation of the internal market.

(6) Greater convergence between the tax rates applied in the Member States would help reduce fraud and smuggling within the Community. The introduction of a fixed minimum amount expressed in euros, in addition to the minimum excise incidence of 57 % of the retail selling price of cigarettes of the price category most in demand, will ensure that a minimum level of excise duties is levied on such cigarettes. Member States which already levy a high level of excise duty should be allowed greater leeway in setting the rates.

(7) The Treaty requires that the definition and implementation of all Community policies and activities ensure a high level of human health protection. Cigarettes and fine-cut tobacco intended for the rolling of cigarettes are both harmful to consumers' health. The level of taxation is a major factor in the price of tobacco products, which in turn influences consumers' smoking habits. For this reason, it is necessary gradually to bring the minimum rates for fine-cut rolling tobacco closer to the minimum rate for cigarettes.

(8) In order to avoid a fall in the value of the Community minimum rates of duty on cigars, cigarillos, fine-cut tobacco intended for the rolling of cigars and other smoking tobaccos, a phased increase in the minimum rates, expressed as a specific amount, is needed.

(9) Any harmonisation of the structures of excise duties should be such as to prevent distortions of competition between different categories of manufactured tobacco belonging to the same group and thereby facilitate access to the domestic markets of the Member States.

(10) In the interests of uniform and fair taxation, the definition of cigars and cigarillos, set out in Council Directive 95/59/EC of 27 November 1995 on taxes other than turnover taxes which affect the consumption of manufactured tobacco [15], should be adapted so that a type of cigar which is similar in many respects to a cigarette is treated as a cigarette for excise purposes.

[15] OJ L 291, 6.12.1995, p. 40, Directive as amended by Directive 1999/81/EC

(11) Member States should be given more effective means to deal with unfair pricing practices or the appearance of products which disrupt the market: this objective can be achieved by authorising Member States to levy a minimum excise duty on cigarettes on condition that it does not exceed the excise duty levied on cigarettes of the most popular price category.

(12) It is necessary to provide for a regular review procedure: however, a four-yearly review period would be more appropriate, to allow time to evaluate the amendments introduced by this Directive.

(13) Directives 92/79/EEC, 92/80/EEC and 95/59/EC should therefore be amended accordingly,

HAS ADOPTED THIS DIRECTIVE:

Article 1

Directive 92/79/EEC is amended as follows:

(1) Article 2 is replaced by the following

"Article 2

Each Member State shall apply an overall minimum excise duty (specific duty plus ad valorem duty excluding VAT), the incidence of which shall be set at 57% of the retail selling price (inclusive of all taxes) and EUR 70 per 1000 cigarettes for cigarettes of the price category most in demand.

Member States which levy a total excise duty of at least EUR 100 per 1000 cigarettes for cigarettes of the price category most in demand need not comply with the 57% minimum incidence requirement.

The overall minimum excise duty on cigarettes shall be determined on the basis of cigarettes of the price category most in demand according to data established as at 1 January of each year."

(2) Article 4 is replaced by the following:

"Article 4

Not less frequently than every four years after the Council's previous examination, the Council, acting on the basis of a report and, where appropriate, a proposal from the Commission, shall examine the overall minimum excise duty laid down in Article 2 and in Article 3(2) and the structure of excise duties as defined by Article 16 of Council Directive 95/59/EC of 27 November 1995* on taxes other than turnover taxes which affect the consumption of manufactured tobacco and, acting unanimously after consulting the European Parliament, shall adopt the necessary measures. The report by the Commission and the examination by the Council shall take into account the proper functioning of the internal market and the wider objectives of the Treaty.

* OJ L 291, 6.12.1995, p. 40"

Article 2

Directive 92/80/EEC is amended as follows:

(1) In Article 3 (1) the following subparagraphs are added:

"As from 1 January 2002, the overall excise duty levied on fine-cut smoking tobacco intended for the rolling of cigarettes shall be at least equal to 33% of the retail selling price inclusive of all taxes, or EUR 28 per kilogram.

As from 1 January 2003, the overall excise duty shall be at least equal to the following rates or minimum amounts:

(a) in the case of cigars or cigarillos: 5 % of the retail selling price inclusive of all taxes or EUR 11 per 1,000 items or per kilogram;

(b) in the case of fine-cut smoking tobacco intended for the rolling of cigarettes: 36% of the retail selling price inclusive of all taxes, or EUR 31 per kilogram;

(c) in the case of other smoking tobaccos: 20% of the retail selling price inclusive of all taxes, or EUR 20 per kilogram.

As from 1 January 2004, the overall excise duty levied on fine-cut smoking tobacco intended for the rolling of cigarettes shall be at least equal to 39% of the retail selling price inclusive of all taxes, or EUR 34 per kilogram."

(2) Article 4 is replaced by the following:

"Article 4

Not less frequently than every four years after the Council's previous examination, the Council, acting on the basis of a report and, where appropriate, a proposal from the Commission, shall examine the rates of duty laid down herein and, acting unanimously after consulting the European Parliament, shall adopt the necessary measures. The report by the Commission and the examination by the Council shall take into account the proper functioning of the internal market, the real value of the rates of duty and the wider objectives of the Treaty."

Article 3

Directive 95/59/EC is amended as follows:

(1) Article 3, points (3) and (4) are replaced by the following:

" (3) Rolls of tobacco with a threshed blend filler and with an outer wrapper of the normal colour of a cigar covering the product in full, including where appropriate the filter but not in the case of tipped cigars, the tip, and a binder, both being of reconstituted tobacco, where the unit weight, not including filter or mouth-piece, is not less than 1,2 g and where the wrapper is fitted in spiral form with an acute angle of at least 30° to the longitudinal axis of the cigar;

(4) Rolls of tobacco with a threshed blend filler and with an outer wrapper of the normal colour of a cigar, of reconstituted tobacco, covering the product in full, including where appropriate the filter but not, in the case of tipped cigars, the tip, where the unit weight, not including filter or mouth-piece, is not less than 2.3g and the circumference over at least one third of the length is not less than 34 mm."

(2) Article 16(5) is replaced by the following:

"5. Member States may levy a minimum excise duty on cigarettes, provided that it does not exceed the excise duty levied on cigarettes of the most popular price category."

Article 4

Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 1 January 2002 at the latest. They shall forthwith inform the Commission thereof.

When Member States adopt those provisions, they shall contain a reference to this Directive or be accompanied by such a reference on the occasion of their official publication. Member States shall determine how such reference is to be made.

Member States shall communicate the text of the provisions of national law which they adopt in the field covered by this Directive.

Article 5

This Directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Communities.

Article 6

This Directive is addressed to the Member States.

Done at Brussels,

For the Council

The President