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"
Date: 2001-10-18
Institutions: European Economic and Social Committee
Subjects: excise duty, tax harmonisation, tax on consumption, tobacco, tobacco industry

8.2.2002

EN

Official Journal of the European Communities

C 36/111

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 tobac-
co. 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.)

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.

On the basis of this third report, which follows on
1.5.
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

The Commission report notes that, despite the current
2.1.
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.

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.

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.

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 1 000 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.

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

Directive 92/79/EEC provides that every three years
1.4.
the Commission must present a report and, where appropriate,
proposals for revision of the Directives to the Council, on the

In addition to the existing regime for excise duty on
2.2.1.
cigarettes,
the Commission proposes introducing a fixed
minimum amount of EUR 70 per 1 000 cigarettes for the
categories most in demand. The Member States would there-
fore have to meet two requirements: the 57 % minimum

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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 1 000 cigarettes
should not be required to comply with this 57 % rule.

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.

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, pro-
vided 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.

3.2.1.
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.

The Commission report also refers to cross-border
3.2.2.
tax revenue for
transactions and the subsequent
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).

loss of

A number of studies on this issue clearly show
3.2.2.1.
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.

The Commission proposes introducing a flat-rate duty
3.3.
of EUR 70 per 1 000 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.

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

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3.3.1.
The Committee highlights two principles defended
by the Commission when cigarette tax harmonisation
measures were adopted in 1972 (1):

— 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.

However,

3.3.1.1.
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 con-
cerned, only Portugal levies a specific duty considerably higher
than the obligatory minimum rate of 5 %) (2).

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.

The Committee therefore asks what led the Com-
3.3.1.3.
mission 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 south-
ern Europe.

3.3.2.1.
Traditional European industries that manufacture
local products at moderate prices would also be at a disadvan-
tage 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 poten-
tial 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 (3).

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-Com-
munity 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.

The Committee also wishes to express its concern
3.5.
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 men-
tioned in the Commission report are unlikely to resolve this
problem.

(1) EC Directives 72/464 and 77/805.
(2) Annex C of the Commission report: EL 5.09 %, E 5 %, I 5 %, L

15 % and P 41.6 %.

(3) COM(1999) 594 final.

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The Commission,

3.6.
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.

Finally, the Committee agrees with the Commission
3.7.
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.

Brussels, 18 October 2001.

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.

Finally, according to the Commission report,

4.4.
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’ (1).
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 har-
monisation 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.

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

The President

of the Economic and Social Committee

Göke FRERICHS