Report from the Commission to the European Parliament and the Council on the structure and rates of excise' duty applied on cigarettes and other manufactured tobacco products {SEC(2008) 2266} {SEC(2008) 2267}
Date: 2008-07-16
Institutions: European Commission
Subjects: tax harmonisation, tax system, tobacco, tobacco industry

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 16.7.2008 
COM(2008) 460 final 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

on the structure and rates of excise' duty applied on cigarettes and  
other manufactured tobacco products 

{SEC(2008) 2266} 
{SEC(2008) 2267} 

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1. 

INTRODUCTION 

Under Article 4 of Council Directive 92/79/EEC of 19 October 1992 on the approximation of 
taxes on cigarettes1 and Article 4 of Council Directive 92/80/EEC of 19 October 1992 on the 
approximation  of  taxes  on  manufactured  tobacco  other  than  cigarettes2the  European 
Commission  is  required  to  examine  every  four  years  the  smooth  operation  of  the  single 
market,  the  real  value  of  excise-duty  rates  and  the  wider  objectives  of  the  Treaty.  This 
examination  is  supposed  to  extend  to  relevant  provisions  of  Directive  95/59/EC  of  27 
November  1995  on  taxes  other  than  turnover  taxes  which  affect  the  consumption  of 
manufactured tobacco3. 

Given  the  nature  of  manufactured  tobacco  products,  particular  attention  has  to  be  paid  to 
health aspects. Article 152 of the Treaty provides that a high level of human health protection 
shall  be  ensured  in  the  definition  and  implementation  of  all  Community  policies  and 
activities.  In  2005,  the  European  Community  became  party  to  the  World  Health 
Organization’s  Framework  Convention on Tobacco Control  (FCTC). Article 6 of the FCTC 
recommends  tax  policies  so  as  to  contribute  to  health  objectives  aimed  at  reducing  tobacco 
consumption.  

A  broad  consultation  process  preceded  this  report.  Taking  into  account  the  outcome  of  this 
consultation process, the Commission services have carried out an impact assessment.  

2. 

THE STRUCTURE OF EXCISE DUTIES ON CIGARETTES  

This report examines a number of possible changes to the current structure of excise duties on 
cigarettes.  More  in  particular  it  examines  whether  the  concept  of  the  most  popular  price 
category (MPPC) could be abolished as a benchmark for minimum requirements. In addition, 
it scrutinises whether more flexibility  could be provided to Member States to determine the 
relation between ad valorem and specific duties, as well as to set the level of minimum excise 
duties on cigarettes.  

2.1. 

The MPPC as a benchmark for the minimum requirements 

Under the current arrangements, the MPPC is the benchmark for minimum requirements on 
cigarettes. Currently, excise duties levied on cigarettes must account for at least 57% of the 
retail  selling  price,  inclusive  of  all  taxes,  and  be  at  least  €64  per  1000  cigarettes  for  the 
cigarettes  belonging  to  the  MPPC.  If,  at  1st  January  of  any  year,  the  category  changes, 
Member States must check continuing compliance with the minimum requirements. 

During the consultation process, the MPPC received a certain amount of criticism: 

•  The  MPPC  is  a  concept  that  was  introduced  30  years  ago.  At  that  time,  the  national 
cigarette markets were typically dominated by one brand. However, currently the average 
market share of the MPPC is approximately 35%.  

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OJ L316, 31.10.1992, p.8 last amended by Directive 200/10/EC (OJ L 046, 16.02.2002, p.26) 
OJ L316, 31.10.1992, p10 last amended by Directive 200/10/EC (OJ L 046, 16.02.2002, p.26) 
OJ L 291, 06.12.1995, p.40, last amended by Directive 2000/10/EC (OJ L 046, 16.02.2002, p.26) 

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•  The  MPPC  tends  to  fluctuate  due  to  changes  in  consumption  patterns,  which  makes. 

government tax revenues volatile.  

•  It  also  distorts  price  competition  between  tobacco  manufacturers.  Dominant  tobacco 

manufacturers can increase the tax burden of their competitors.  

•  In  certain  Member  States  the  MPPC  falls  within  a  low  price  category  while  in  other 
Member  States  it  falls  within  a  high  price  category.  Consequently,  the  MPPC  cannot 
ensure a uniform minimum level in all Member States.  

•  Finally,  from  a  health  perspective  it  is  not  justifiable  to  use  the  MPPC  as  the  reference 
point for setting minimum tax requirements. All cigarettes without exception are harmful 
to health, not just those in the MPPC.  

Consequently,  the  Commission  takes  the  view  that  using  the  MPPC  as  a  benchmark  for 
minimum rates is not in line with Internal Market objectives. Moreover, abolishing the MPPC 
would  significantly  simplify  the  arrangements,  improve  transparency  and  underscore  health 
objectives. 

If the MPPC were abolished, two alternative approaches can be considered:  

•  The monetary minimum requirement could be applied to all cigarettes on the market.  

•  Taking  account  of  the  taxation  principles  regarding  cigarettes  for  the  last  35  years,  the 

MPPC could also be replaced by a weighted average price (WAP).  

2.2. 

An EU monetary minimum requirement for all cigarettes  

Apart  from  resolving  fiscal  instability  that  is  created  by  the  MPPC  concept,  the  monetary 
minimum requirement on all cigarettes would create a "tax floor" and it is the best means to 
approximate  prices  and  taxes  of  cigarettes  in  the  Internal  Market.  In  addition,  it  is  the  only 
option  that  would  ensure  a  minimum  price  and  tax  level  for  tobacco  control  and  address 
health concerns for all categories of cigarettes. 

2.3. 

An additional EU minimum requirement on weighted average prices 

The  Commission  has  also  considered  the  consequences  of  applying  the  57  %  rule  to  all 
cigarettes.  The  impact  assessment  makes  it  clear  that  it  would  increase  the  excise  duties  on 
value-for-money  and/or  premium  cigarettes.  In  case  of  rises  of  the  57%,  it  would  stepwise 
transform into a pure ad-valorem duty. Consequently it would not be in line with the objective 
to  provide  flexibility  to  Member  States  as  concerns  the  excise  duty  structure.  In  addition, 
applying  the  57  %  rule  to  all  cigarettes  would  not  contribute  to  narrowing  the  gap  between 
prices and taxes of cigarettes in the Internal Market and therefore cannot be justified neither 
from an internal market nor from a health perspective. 

An alternative would be to apply the 57% rule on the basis of weighted average prices. This 
has a number of advantages from an Internal Market and health perspective: 

•  It  would  be  neutral  towards  the  price  categories  and  provides  a  level  playing  field  for 

manufacturers. 

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•  It  would  leave  flexibility  to  Member  States  to  determine  the  taxation  structure  (in 
particular  the  relation  between  ad  valorem  and  specific  duties)  that  best  suits  the 
requirements of their national market.  

•  It would provide a comparable benchmark for minimum requirements for excise duties on 

cigarettes between Member States in the EU. 

•  It would be easier to administer than a system on the basis of a MPPC. 

Some  cigarette  manufacturers  have  advocated  abolishing  the  57%  rule  altogether.  However 
the Commission takes the view that the 57% rule remains an essential part of the acquis in the 
field of tobacco taxation, since currently for a number of Member States only the proportional 
requirement prohibits a decrease of the taxation level.  

In  conclusion,  in  order  to  simplify  the  arrangements,  create  a  level  playing  field  for 
manufactures,  to  reduce  the  partitioning  of  the  tobacco  markets  and  underscore  health 
objectives, the concept of the most popular price category should be replaced as a reference 
for minimum requirements by weighted average prices combined with a monetary minimum 
applicable to all cigarettes.  

The  reasons  for  which  the  MPPC  should  no  longer  be  a  benchmark  for  the  Community 
minima also apply to the provisions concerning the importance of specific excise duty within 
the total tax burden (Article 16(2) of Directive 95/59/EC). Here again, the reference should be 
the WAP. 

2.4.  More flexibility in the structures of the excise duties on cigarettes 

Under current Community rules, excise duties levied on cigarettes must include an ad valorem 
and a specific component. The emphasis Member States put either on the ad valorem  or  on 
the  specific  element,  depends  on  the  policy  objective  pursued.  (see  annex  1,  graph  2). 
Currently, the specific component of excise duty must not represent less than 5% or more than 
55% of the amount of the total tax burden on cigarettes falling in the MPPC (the proportional 
excise duty plus the specific excise duty and the VAT).  

Ad  valorem  duties  increase  absolute  price  differences  and  consequently  promote  cheaper 
brands  of  cigarettes.  In  the  past  ad  valorem  duties  were  applied  to  favour  cheaper  local 
cigarettes above more expensive international brands. However, nowadays ad valorem duties 
are mainly attractive to those Member States where there is a greater risk of a monopolistic 
situation developing in the market.  

Specific  duties  reduce  relative  price  differences  and  minimise  the  variability  of  prices. 
Consequently specific duties have an advantage from a health point of view. Specific duties 
also have a number of other benefits. A scenario that sets all duties to specific duties would 
entail  a  narrowing  of  price  differences  at  EU  level  by  50%.  Therefore,  greater  reliance  on 
specific  duties  can  lead  to  further  approximation  of  retail  selling  prices  within  the  EU. 
Furthermore, as they are based on consumption volumes rather than on prices, specific duties 
are more stable, easier to forecast and to administer and increase the stability of tax revenues.  

In conclusion from an internal market, budgetary as well as a health point of view, specific 
duties  have  clear  advantages  and  more  flexibility  should  therefore  be  provided  to  those 
Member States that place greater reliance on specific excise duties. 

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However,  in  order  to  avoid  a  situation  of  purely  specific  taxation  in  one  Member  State  and 
purely  ad  valorem  taxation  in  a  neighbouring  Member  State,  which  would  result  in  cross 
border flow for premium brands from the first to the second Member State with cheap brands 
flowing in the opposite direction, some consistency in excise tax structures remains desirable.  

2.5. 

Flexibility to apply minimum excise duties on cigarettes 

Most  Member  States  also  use  a  minimum  excise  tax,  in  addition  to  the  ad  valorem  and 
specific excise duties. This means that each pack of cigarettes must bear a minimum amount 
of excise duty. Minimum taxes are intended to provide Member States with a certain level of 
revenue and ensure that cigarettes are not sold at prices far below normal market levels.  

Member States may levy a minimum excise tax but this may not be more than 100% of the 
total  excise  on  the  MPPC.  This  means  that  in  certain  countries  where  the  MPPC  is  a  low 
priced cigarette, the tool of minimum excise duty has limitations. In recent years the market 
share of cheaper brands of cigarettes has soared in a majority of Member States resulting in 
either reduced revenue receipts or the impact of tax increases on the consumption of cigarettes 
being lessened. Consequently some Member States reported that they would welcome greater 
flexibility in tackling cheaper brands of cigarettes.  

Therefore, greater flexibility could be provided in the current EU requirements by no longer 
restricting  the  level  of  the  minimum  tax  to  the  excise  due  on  the  MPPC,  as  is  currently  the 
case for other manufactured tobacco.  

3. 

MINIMUM RATES OF EXCISE DUTIES ON CIGARETTES 

This  report  also  examines  whether  changes  to  the  current  structure  of  excise  duties  on 
cigarettes could be combined with an increase in the minimum rates. Currently, excise duties 
levied on cigarettes must account for at least 57% of the retail selling price, inclusive of all 
taxes, and, since July 2006, be at least €64 per  1000 cigarettes for the cigarettes belonging to 
the MPPC. Under their Acts of Accession, the new Member States, except Malta and Cyprus, 
were  granted  derogations  to  postpone  the  application  of  the  minimum  excise  duties  for 
periods ranging from 31 December 2006 to 31 December 2009. 

3.1. 

General remarks 

An  analysis  of  the  prices  and  excise  rates  for cigarettes  in  the  EU  shows  that  there  are  still 
considerable differences between Member States. Indeed, with the recent enlargements of the 
EU,  the  tax  and  retail  selling  price  differentials  between  Member  States  have  actually 
widened.  However,  this  is,  to  a  certain  extent,  due  to  the  existence  of  transitional  periods 
provided  under  the  Acts  of  Accession.  When  all  new  Member  States  comply  with  the 
the price differentials will be reduced, but 
minimum requirement of €64 per 1000 cigarettes, 
cigarettes will still be more than 4 times more expensive in certain Member States as compare 
to others.(see annex 1, graphs 1 and 3). 

3.2. 

Impact of differences in TIRSP for Member States and the Internal Market 

The  significant  differences  in  TIRSP  (tax  inclusive  retail  selling  price)  between  Member 
States  has  created  an  environment  for  purely  tax  induced  cross-border  shopping  and  for 

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smuggling and fraud. Indeed, the tobacco sector is particularly susceptible to these activities. 
Based  on  an  in-depth  analysis  of  the  data  collected,  a  study4  prepared  for  the  Commission 
estimated  that  the  total  market  penetration  of  the  non-domestically  taxed  consumption 
represented  in  2004  approximately  13%  of  the  EU-25  tobacco  market  whereby  4%  to  5% 
consists  of  legitimate  cross-border  shopping  and  8%  to  9%  of  illicit  trade.  However  some 
main  markets,  with  relatively  high  excise  duties  often  implemented  in  pursuit  of  health 
objectives,  face  an  inflow  of  more  than  20%.  Conversely,  a  number  of  Member  States 
maintain lower tax rates, thus imposing external costs on other Member States. 

3.2.1.  Cross border shopping 

Cross-border shopping is entirely legitimate and, indeed, constitutes one of the benefits of the 
internal market provided the products are purchased by individuals for their own personal use. 
However, this can cause a problem for higher taxing Member States. 

Cross-border  shopping  for  cigarettes  increased  sharply  in  certain  Member  States  once  they 
had introduced large increases in their excise duty rates, which they had often implemented in 
pursuit of health objectives.  

Moreover, there is a clear in-flow of cheap cigarettes from certain new Member States into, 
particularly, neighbouring EU-15 Member States.  

3.2.2.  Illicit trade 

Illicit  trade  covers  goods  smuggled  from  third  countries  (often  involving  counterfeit 
cigarettes)  as  well  as  Intra-EU  "smuggling"  where  individuals  purchase  tobacco  in  other 
Member  States  ostensibly  for  their  use  but  instead  sell  it  without  paying  excise  duty  in  the 
Member State of consumption. Third country smuggling is circumvention of customs controls 
by fraudsters who smuggle products by various methods (concealment, false description and 
false declaration etc) from neighbouring third countries such as Belarus, Russia, and Ukraine 
where  prices  and  taxes  are  low.  Another  upward  trend  concerns  smuggled  counterfeit 
cigarettes coming from overseas territories (e.g. China). An estimate of counterfeit is difficult 
to  make  but  it  is  certain  that  the  market  share  of  counterfeit  cigarettes  is  rising  in  some 
countries. 

In  order  to  restrict  these  negative  effects  there  should  be  an  EU-wide  minimum  floor  for 
excise duty at an effective level to address Internal Market objectives. On the other hand third 
country smuggling and counterfeit requires reinforcing of external border controls. 

3.3. 

Health objectives 

Smoking is still the biggest single form of avoidable death in the Community and one of the 
leading causes of illness and mortality in the EU. Taxation forms part of an overall strategy of 
prevention  and  dissuasion  which  also  includes  other  measures  intended  to  reduce  demand 
such as protection from exposure to tobacco smoke, regulation of the contents, etc. According 
to the World Bank, price increases of tobacco products are the most effective single measure 
to prevent smoking. A price increase of 10% will decrease consumption on average by about 
4%  in  high-income  Member  States  among  adults.  More  importantly,  the  impact  of  higher 

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Study on the collection and interpretation of data concerning the release for consumption of cigarettes 
and fine-cut tobacco for the rolling of cigarettes; KPMG December 2005. 

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prices is likely to be greatest on young people, who  are  more  responsive  to  price  rises  than 
older people.  

In  2005,  the  European  Community  became  Party  to  the  World  Health  Organization’s 
Framework Convention on Tobacco Control (FCTC). Article 6 of the FCTC recommends tax 
policies  so  as  to  contribute  to  health  objectives  aimed  at  reducing  tobacco  consumption. 
Official releases for consumption of cigarettes in the EU decreased  during  the  period 2002-
2006  by  ca.  13%.  (See  annex  3)  This  percentage  takes  into  account  intra  EU  cross-border 
flows,  but  needs  to  be  adjusted  for  the  illicit  trade  from  third  countries  towards  the  EU. 
Consequently the real decline of cigarette consumption in the EU can be estimated at slightly 
more than 10%.5 

This  trend  is  mainly  due  to  the  EU-15  where  releases  for  consumption  of  cigarettes  went 
down by 16%. Over the same period the excise duties on cigarettes increased on average by 
33%.  

On the other hand, in the EU-12 (Excl. RO) releases for consumption decreased on average 
by only 1%. From the accession until the end of 2006, there has been on average an increase 
of 34% in the excise duties. The fact that, in spite of a significant increase in excise duties, the 
decrease  in  consumption  has  been  small  can  probably  be  explained  by  the  low  level  of 
taxation before accession. 

In order to trigger a similar decline in consumption over the coming 5 years further increases 
in  excise  duties  would  be  desirable.  Taking  into  account  a  price  elasticity  of  -0.43  as 
suggested by the World Bank, a 25% price increase is needed to achieve a 10% reduction in 
demand.  

Minimum  rates  provide  a  "safety  net"  for  Member  States  by  ensuring  that  other  Member 
States do actually apply excise duty and that the levels are meaningful. Thereby, they make it 
easier  for  other  Member  States  to  pursue  their  fiscal  policies  in  the  interest  of  health 
protection, without the threat of those policies being undermined by other Member States and, 
in particular, by cross-border shopping and smuggling. Indeed, in the field of tobacco taxation 
these minimum rates should be at a level to allow Member States to pursue tobacco control 
objectives.  With  a  view  to  attaining  this  objective,  the  EU  minimum  requirements  (which 
were  agreed  upon  in  2002)  should  not  only  consolidate  the  current  situation,  but  should  be 
further increased over the following 5 years. 

3.4. 

Closer approximation of rates – increasing the minimum rates 

For  these  reasons,  greater  convergence  between  the  taxation  levels  of  the  different  Member 
States,  would  contribute  to  restricting  distortions  of  the  Internal  Market  and  safeguarding 
health protection objectives.  

3.4.1.  The minimum duty of €64 per 1000 cigarettes  

The  current  EU  minimum  duty  of  €64  per  1000  cigarettes  is  insufficient  to  achieve 
approximation  of  retail  selling  prices  between  high  and  low  taxing  Member  States.  The 

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Industry sources estimate the total inflow from third countries around 3%. However only the increase of 
this kind of inflow between 2002 and 2006 should be taken into account, which is most probably less 
than 3%. 

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attraction  for  individuals  in  high  taxing  Member  States  to  make  their  purchases  in  lower 
taxing Member States undermines the Internal Market as well as tobacco control objectives. 
Therefore,  to  counter  this  threat,  the  EU  minimum  monetary  requirement  would  need  to  be 
increased  substantially.  However,  any  proposal  for  increases  must  take  into  account  that  a 
number of Member States still have transitional periods for the current minimum rates. 

3.4.2.  The 57% minimum requirement 

The  57%  minimum  requirement  has  not  been  modified  since  it  was  introduced  in  1992. 
However, to date, in countries with a health driven taxation policy excise duties account for 
more  than  60%  of  the  TIRSP.  When  all  new  Member  States  eventually  comply  with  the 
minimum  of  €64,  the  excise  yield  will  also  be  more  than  60%  in  most  of  those  Member 
States. Since the pre-tax price of cigarettes is, to a large extent, related to purchasing power, 
an increase in the minimum requirement would align the level of taxation in this respect. In 
other words, this would entail an increase in the excise duties in Member States where excise 
duties on cigarettes are relatively low as compared to purchasing power. 

As  aforementioned,  the  57%  rule  is  combined  with  an  "escape  clause"  for  high-taxing 
Member States6. The aim is to avoid an increase in the excise duties in those Member States 
where  they  are  already  high  and  consequently  to  avoid  an  increase  in  the  gap  between  the 
highest and lowest taxing Member States. In order to keep the 57% rule meaningful, its level 
needs  to  be  updated.  In  2001  the  "escape  clause"  was  set  at  €101.  Currently  an  increase  to 
€122 would keep pace with the recent evolution of  excise duties on cigarettes in the Internal 
Market  and  would  have  the  same  effect  as  in  2001,  namely  cover  the  five7highest  taxing 
Member States. 

In  order  to  achieve  Internal  Market  and  health  objectives  both  minimum  rates  could  be 
increased over the following 5 years. 

The average excise yield in the EU-27 will be slightly over €90 when  all new member States 
have reached the current minima and the average excise burden around 63%. 

The  impact  assessment  concludes  that,  from  a  health  perspective,  an  increase  to  €90  on  all 
and  63%  on  WAP  would  trigger  a  probable  decrease  of  demand  of  on  average  10%  in  22 
Member States8. In addition it would pave the way for  further  increases of excise  duties on 
cigarettes, also by those Member States which already have a high level of taxation. 

In terms of local purchasing power, only in BG and RO, would an immediate increase render 
prices over-expensive as compared to the prices in the main markets of the EU. However it 
must  also  be  taken  into  account  that  a  number  of  Member  States  currently  still  have 
transitional periods until 2009 or 2010.  

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Member  States  which  levy  an  excise  duty  of  at  least  €  101  per  1000  cigarettes  for  cigarettes  of  the 
MPPC need not comply with the 57 % rule. 
UK, IE, FR, DE and SE. 
Except  in  the  high  taxing  Member  States  UK,  IE,  FR  and  DE.  (and  RO  was  not  included  in  the 
simulation) 

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3.5. 

Compliance costs 

There are two main causes that fuel non-domestic taxed consumption: the fact that cigarettes 
are  less  affordable  due  to  sharp  tax  increases  and  the  fact  that  certain  Member  States  share 
porous land borders with low-tax third countries.  

Further  approximation  of  excise  duties  within  the  EU  and  better  coordination  of  price 
increases on cigarettes for tobacco control will certainly contribute to tackling the problem of 
illegal trade within the EU. It will reduce compliance costs within the Internal Market, where 
there are no border controls anymore. 

However  a  number  of  new  Member  States  have  land  borders  with  neighbouring  third 
countries were the level of taxation and the retail selling prices of tobacco products are low as 
compared  to  the  EU  level.  This  encourages  a  high  level  of  third  country  smuggling  which 
undermines the functioning of the internal market as well as the EU and its Member States' 
health policy.  

Third country smuggling is in particular high in a number of the Member States having land 
borders with third countries. In order to reduce the third country smuggling the excise duties 
are often kept low. As a result these Member States attract cross-border shopping and illicit 
trade towards other Member States, thus imposing external costs on the Internal Market. 

Therefore increases of excise duties on cigarettes should be combined with a reinforcement of 
the fight against illicit trade from third countries.  

The  fight  against  illicit  trade  is  mainly  a  responsibility  for  Member  States.  However,  the 
Commission,  a  signatory  to  the  World  Health  Organization’s  Framework  Convention  on 
Tobacco Control (FCTC), is playing an active role in the on-going negotiations to elaborate a 
Protocol on the Illicit Trade in Tobacco Products in accordance with Article 15 of the FCTC. 
The aim of the Protocol is to develop an internationally binding legal instrument to curb the 
illicit trade in tobacco products which all of the 152 countries which have ratified the FCTC 
will be invited to join.  

4. 

THE STRUCTURE AND MINIMUM RATES OF EXCISE DUTIES ON FINE-CUT TOBACCO 

4.1. 

General remarks  

The market for fine-cut tobacco accounts for around 8% of the total EU market for tobacco 
products. Fine-cut tobacco and cigarettes have different characteristics. but remain ultimately 
in competition with each other as smoking products.  

The substantial differences in tax levels among Member States on fine-cut tobacco encourage 
smuggling  and  cross  border  shopping  between  a  number  of  neighbouring  countries.  In 
addition, the gap between the level of taxation of cigarettes and fine-cut tobacco gives rise to 
product  substitution.  In  the  period  2002  to  2006  the  weighted  average  of  quantities  of 
cigarettes released in the EU-259 decreased by around 13%. However, the quantities of fine-
cut tobacco increased in the same period by around 10%. (See annex 4) 

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No data are available for RO and BU. 

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Also from a health point of view, there is little justification for significant differences in the 
taxation level for these products at Community level because both are equally harmful. 

4.2. 

The structure of excise duties on fine-cut tobacco 

Currently  Member  States  are  free  to  determine  the  excise  structure  for  fine-cut  smoking 
tobacco intended for the rolling of cigarettes (specific or ad valorem or mixed).  

The public consultation made clear that the vast majority of stakeholders are opposed to any 
restriction  of  the  current  flexibility  in  the  field  of  fine-cut  tobacco.  In  addition,  since  the 
objective is to provide more flexibility to Member States for cigarette taxation, it would not 
be desirable to restrict simultaneously flexibility for fine-cut. 

Given  that  EU  minima  for  cigarettes  are  set  by  way  of  overall  minimum  requirements,  the 
alignment  of  taxation  on  cigarettes  and  fine-cut  tobacco  should  proceed  on  the  basis  of 
minimum  rates,  leaving  Member  States  with  the  flexibility  to  determine  the  relationship 
between ad-valorem and specific taxes.  

The minimum requirements for cigarettes consist of a compulsory ad-valorem minimum and a 
monetary  minimum.  Conversely,  for  fine-cut  tobacco  Member  States  have  to  comply  with 
either the one or the other. Consequently, in those Member States that apply an ad-valorem 
taxation on fine cut, there is no monetary minimum requirement such as there is for cigarettes. 
As a result, there are wide gaps between taxes and prices of fine-cut in the EU. In addition, 
there are situations today where the tax level on hand-rolled cigarettes is less than 30% of the 
tax level on cigarettes. (see annex 2 ) 

Therefore,  the  introduction  of  a  combination  of  a  proportional  minimum  and  a  monetary 
minimum for fine-cut would be an appropriate way to align taxation on cigarettes and fine-cut 
tobacco.  

4.3. 

The minimum rates on fine-cut tobacco 

Currently the minimum rates for fine-cut are set at 36% of the retail selling price inclusive of 
all taxes, or €32 per kilogram. 

In order to maintain the ratio established when the rates were first set in 1992, the minimum 
specific  amounts  were  adjusted  in  line  with  inflation  following  the  1998  and  2001  reviews. 
An adjustment for inflation for the period 2004 - 2007 would give €34. However, as stated in 
the  previous  report,  the  minimum  rates  for  fine-cut  tobacco  should  be  fixed  at  about  two 
thirds of the minimum rates for  cigarettes. Such a ratio would allow Member States to take 
into account the difference between a semi-finished and a finished product, differences in cost 
price between the two products and the relatively labour-intensive process of manufacturing 
fine-cut tobacco. 

In order to obtain at least two thirds of the minimum on cigarettes, the minimum on fine-cut 
tobacco would have to be increased above inflation. The specific amount should be fixed at 
garettes. A two thirds minimum proportional 
€43 per kilogram as compared to €64 per 1000 ci
requirement would result in a minimum incidence for fine-cut tobacco of 38% as compared to 
57% for cigarettes. Such an increase would most of all affect the new Member States which 
still have derogations to the current minimum rates for cigarettes. However as these Member 
States  will  have  to  increase  the  excise  duties  on  cigarettes  by  the  end  of  the  transitional 
periods, it is likely that they will in any case increase in parallel the excise duties on fine-cut 

EN 

10 

   EN 

tobacco. Consequently a coordinated approach would avoid further distortions of the Internal 
market.  

The impact assessment concludes that from a health perspective an increase in the minimum 
rates  for  cigarettes  to  €90  would  be  necessary   over  the  coming  years  in  order  to  trigger  a 
probable decrease of demand of on average 10%. Consequently, applying the aforementioned 
2/3 relationship, the minimum rates for fine cut would increase to €60 over the coming years. 

This could trigger a reduction in demand of around 20%, taking into account the same price 
elasticity as for cigarettes. Taken into account that in the period 2002 to 2006 the quantities of 
cigarettes released in the EU decreased by approximately 13% as opposed to the quantities of 
fine-cut tobacco which increased by around 10% in the same period. Such a reduction would 
bring fine-cut into line with cigarettes.  

5. 

THE  STRUCTURE  AND  MINIMUM  RATES  OF  EXCISE  DUTIES  ON  OTHER 
MANUFACTURED TOBACCO THAN CIGARETTES AND FINE-CUT TOBACCO 

Other  manufactured  tobacco  under  this  heading  covers  cigars,  cigarillos  and  other  smoking 
tobacco  (mainly  pipe-tobacco).  This  market  is  less  than  1%  of  the  total  market  for 
manufactured  tobacco  and  is  declining.  The  internal  market  for  other  smoking  tobacco  is 
working relatively well and no considerable fraud or smuggling has been reported. 

However,  in  a  number  of  Member  States,  new  products  have  appeared  which  are  taxed  as 
cigars or pipe tobacco, but are marketed as and in direct competition to cigarettes or fine-cut 
tobacco.  In  order  to  avoid  tax  induced  distortions  of  competition,  the  definitions  of  the 
different categories of other manufactured tobacco products should be made more accurate.  

In addition, an adjustment  of  the  specific excise duty  for cigars and cigarillos and for other 
smoking tobacco is needed to take account of inflation for the period 2003 to 2007. On the 
basis  of  Eurostat  data  on  the  annual  rate  of  change  of  the  HICP  (Harmonised  Index  of 
Consumer Prices) between 2003 and 2007, the rate of inflation can be estimated at around 2% 
a year or at 8% over the period as a whole.  

7. 

CONCLUSIONS 

The review of the structure and rates of excise duty on manufactured tobacco products leads 
us  to  conclude  that  a  number  of  important  amendments  to  the  existing  legislation  are 
necessary: 

–  With  a  view  to  more  transparency  of  the  arrangements  and  in  order  to  create  a 
level  playing  field  across  the  tobacco  sector,  the  MPPC  (the  most  popular  price 
category) should be replaced as a reference point for EU minimum requirements 
by  weighted  average  prices  (WAP).  In  order  to  underscore  health  objectives  it 
should be combined with a monetary minimum applicable to all cigarettes. WAP 
should also be the reference for measuring the importance of specific excise duty 
within the total tax burden(Article 16(2) of Directive 95/59/EC). 

–  Member  States  should  be  allowed greater flexibility as concerns the structure of 

excise duties on cigarettes. 

EN 

11 

   EN 

–  The  introduction  of  a  combination  of  a  proportional  minimum  and  a  monetary 
minimum for fine-cut would be an appropriate way to align taxation on cigarettes 
and fine-cut tobacco. 

–  As  far  as  cigarettes  are  concerned,  from  a  health  perspective  an  increase  in  the 
minimum duties over the next five years to €90 on all and 63% on WAP would 
trigger a probable decrease of demand of 10%. Furthermore, it would reduce the 
gap in taxes and prices within the Internal market.  

–  The  minimum  rates  on  fine-cut  tobacco  should  be  adjusted  to  two  thirds  of  the 
rate  for  cigarettes  and  should  be  increased  in  parallel  with  the  excise  duties  on 
cigarettes. 

–  Measures  to  approximate  the  excise  duties  on  cigarettes  in  the  Internal  Market 
should  be  combined  with  a  reinforcement  of  the  fight  against  illicit  trade,  in 
particular from thirds countries. 

–  Finally, the existing definitions of cigars and pipe tobacco should be amended in 
order  to  eliminate  tax  distortions  and  the  minimum  rates  adjusted  for  inflation.

EN 

12 

   EN 

ANNEX 1: 2007 data on cigarettes (MPPC) 

Graph 1 

2007  excise duties / tax inclusive price

450

400

350

300

250

200

150

100

50

0

LV LT BG EE RO PL HU SK CZ SI ES EL CY LU PT IT AT MT NL DK BE FI SE DE FR IE UK

excise yield

21 22 35 35 36 45 48 55 58 59 72 81 84 88 93 99 100 110 114 114 115 120 122 141 160 214 249

tax inclusive price 47 54 59 67 69 74 74 110 100 100 113 140 143 152 150 170 170 181 200 211 188 210 236 235 250 353 401

Member State

Graph 2 

2007 ad-valorem/specific duties/VAT

180

160

140

120

100

80

60

40

20

0

LV LT BG EE RO PL HU SK CZ SI ES EL CY LU PT IT AT MT NL DK BE FI SE DE FR IE UK

ad-valorem 9

8

32 18 20 25 20 25 27 43 64 75 64 72 35 93 73 93 41 29 99 105 92 58 145 63 88

specific

VAT

12 14 3,3 18 16 20 26 29 31 15 8,2 5,1 21 15 58 6,4 27 17 73 85 16 15 30 83 15 151 160

7

8

10 10 11 13 12 18 16 17 16 22 19 20 26 28 28 28 26 42 33 38 47 38 41 61 60

Member State

Graph 3 

2007 pre-tax price cigarettes

450

400

350

300

250

200

150

100

50

0

HU BG PL LV RO EE LT ES SI CZ PT EL SK CY BE AT IT MT LU FR FI DK DE NL SE IE UK

pre-tax price

14 14 15 19 22 22 24 25 25 26 31 37 38 40 41 42 42 43 45 49 52 55 57 60 66 77 93

tax inclusive price 74 59 74 47 69 67 54 113 100 100 150 140 110 143 188 170 170 181 152 250 210 211 235 200 236 353 401

Member State

o
ur
E

o
ur
E

o
ur
E

excise yield

tax inclusive price

ad-valorem

specific

VAT

pre-tax price

tax inclusive price

EN 

13 

   EN 

 
 
ANNEX 2: 2007 data on fine-cut tobacco (MPPC)  

Graph 1 

2007  excise duties / tax inclusiv e price

350

300

250

200

150

100

50

0

HU EE PL CZ LU BG SI LT LV CY ES SK BE PT NL AT FI DE IT DK EL MT FR SE UK IE

excise yield

17 20 23 27 30 32 32 32 33 35 36 36 39 43 45 46 53 56 57 61 63 65 76 104 168 183

tax inclusive price 32 25 38 44 83 89 89 64 81 89 86 70 99 106 100 97 98 118 103 132 106 116 130 207 310 310

Membe r Sta te

Graph 2 

2007 ad-valorem/specific duties/VAT

200

180

160

140

120

100

80

60

40

20

0

AT BE BG CY CZ DE DK EE EL ES FI FR HU IE IT LT LU LV MT NL PL PT RO SE SI SK UK

ad-valorem 17

0

9

0

20 14 27

30

0

9

0

0

0

0

23 32 32 33 35

36

0

0

36

31 43 15 46 49 22 57

8

0

30

0

4

34

0

0

61

63

0

0

65

76

0

0

0

0 104 168 183

specific

VAT

0

5

4

7

7

11 15 15 10 12 12 12 11 17 18 16 16 18 19 17 26 17 18 25 41 46 54 18,0

Member State

Graph 3 

2007 pre-tax price fine-cut

350,0

300,0

250,0

200,0

150,0

100,0

50,0

0,0

AT BE BG CY CZ DE DK EE EL ES FI FR HU IE IT LT LU LV MT NL PL PT RO SE SI SK

pre-tax price

0,7 8,1 9,3 10,021,922,326,527,728,028,734,235,235,838,539,042,042,342,642,642,742,944,745,161,072,795,8

tax inclusive price 25 38 44 32 64 70 106 98 103 130 116 97 81 86 100 89 83 89 89 99 118 106 132 207 310 310

Member State

o
ur
E

o
ur
E

o
ur
E

excise yield

tax inclusive price

ad-valorem

specific

VAT

pre-tax price

tax inclusive price

EN 

14 

   EN 

 
 
ANNEX 3: 2002-2006 releases for consumption of cigarettes  

Releases for consumption of cigarettes - 2002-2006 (1000 pieces) 

EU-27 

2002 

2003 

2004 

2005 

2006 

2002-06

AU 
BE 
CY 
CZ 
DK 
EE 
FI 
FR 
DE 
EL 
HU 
IE 
IT 
LV 
LT 
LU 
MT 
NL 
PL 
PT 
SK 
SI 
ES 
SE 
UK 
BG 
RO 

Total EU 
15 
Total EU 
12 (excl 
RO) 
Total EU 
27 (excl 
RO) 

15.358.733 
14.314.440 
2.017.325 
19.096.775 
7.156.722 
2.294.900 
4.923.954 
80.529.400 
145.152.720 
31.987.518 
18.319.609 
7.015.555 
105.215.836 
3.787.340 
4.979.270 
5.780.790 
596.247 
17.024.215 
82.047.368 
17.924.867 
4.989.533 
4.794.979 
90.615.611 
7.656.792 
56.088.000 
22.612.855 
 na 

15.062.233 
14.286.561 
1.985.432 
25.613.577 
7.872.682 
2.239.173 
4.798.725 
69.647.800 
132.603.170 
32.369.492 
19.435.456 
6.294.855 
101.581.626 
3.994.500 
3.666.203 
5.610.803 
576.900 
17.080.472 
80.244.262 
19.623.143 
2.997.609 
4.611.836 
92.333.287 
7.482.187 
53.952.287 
26.245.083 
 na 

14.463.704 
13.634.112 
1.655.603 
22.459.838 
8.177.705 
2.189.850 
4.929.521 
54.924.400 
111.716.210 
35.185.190 
13.853.849 
5.330.593 
98.846.737 
5.062.364 
2.957.084 
6.374.169 
565.376 
14.999.591 
75.283.084 
18.069.016 
4.564.499 
4.487.482 
93.261.002 
7.281.953 
52.620.073 
23.043.814 
 na 

13.280.238 
13.384.484 
1.921.873 
26.231.340 
7.762.472 
2.421.679 
5.078.000 
54.810.412 
95.826.690 
34.408.444 
14.184.287 
5.419.638 
92.822.302 
4.197.236 
3.721.841 
5.309.000 
589.151 
13.654.000 
87.553.826 
17.134.790 
9.410.743 
4.556.764 
92.699.536 
6.859.511 
50.503.000 
20.596.677 
36.490.906 

13.883.290 
13.705.663 
1.888.343 
28.262.528 
8.215.985 
2.277.728 
4.986.000 
55.772.177 
93.465.500 
33.383.128 
15.810.596 
5.857.276 
93.807.356 
4.753.872 
5.216.700 
4.745.000 
578.686 
13.963.000 
79.769.525 
18.963.003 
4.786.986 
4.947.442 
91.834.325 
7.674.016 
49.011.000 
14.836.821 
32.452.729 

-10% 
-4% 
-6% 
48% 
15% 
-1% 
1% 
-31% 
-36% 
4% 
-14% 
-17% 
-11% 
26% 
5% 
-18% 
-3% 
-18% 
-3% 
6% 
-4% 
3% 
1% 
0% 
-13% 
-34% 
-11% 

606.745.153 

580.599.323 

539.813.976 

508.952.517 

509.266.719 

-16% 

165.536.201 

171.610.031 

156.122.843 

175.385.417 

163.129.227 

-1% 

772.281.353 

752.209.353 

695.936.819 

684.337.934 

672.395.947 

-13% 

EN 

15 

   EN 

ANNEX 4: 2002-2006 releases for consumption of fine-cut 

Releases for consumption of fine cut tobacco - 2002-2006 (kilogram) 

EU-27 

2002 

2003 

2004 

2005 

2006 

2002-06 

AU 

BE 

CY 

CZ* 

DK 

EE 

FI 

FR 

DE** 

EL 

HU 

IE 

IT 

LV 

LT 

LU 

MT 

NL 

PL 

PT 

SK 

SI 

ES 

SE 

UK 

BG 

RO 

Total EU 15 
Total  EU  12  
(excl LT, RO) 
Total  EU  27 
(excl LT, RO) 

259.000 

272.000

298.000

396.000

422.900 

8.417.000 

8.327.000

8.429.000

8.180.707

9.425.583 

62.000 

629.400 

902.200 

8.000 

97.000

650.400

855.200

8.000

949.000 

931.000

152.000

190.300

675.300

10.000

880.000

170.518

423.300

577.000

12.680

883.000

192.799 

481.957 

552.000 

10.680 

796.000 

5.720.900 

5.980.000

6.969.500

7.008.800

7.107.073 

14.441.300 

14.834.100

15.400.000

14.700.900

18.747.400 

800.700 

819.000

964.000

1.038.884

1.247.809 

757.701 

1.159.668

1.027.501

135.568 

285.520 

6.700 

na 

111.904

324.510

7.500

57.151

112.320

463.255

8.200

14.306

895.180

95.972

593.460

14.000

11.500

739.374 

107.264 

677.589 

18.500 

12.718 

3.194.000 

2.983.000

3.006.000

2.970.423

2.845.418 

19.060 

19.850

27.170

30.850

27.290 

13.130.839 

12.943.061

12.087.666

10.970.000

10.811.000 

1.060.000 

1.727.000

2.583.000

302.830 

287.370

326.450

33.527 

30.445 

19.837

28.392

24.000

26.642

828.000

391.470

13.000

16.040

496.000 

358.480 

26.000 

19.120 

1.275.416 

1.785.347

2.254.601

2.684.910

2.612.660 

886.000 

825.000

909.000

966.000

800.000 

2.864.039 

2.893.447

3.052.281

3.189.180

3.453.780 

500 

na 

700

na

1.300

na

2.000

na

8.300 

na 

53.564.312 

54.171.938

55.827.374

54.646.706

59.964.956 

2.607.333 

3.718.347 

4.050.113 

2.405.568 

2.020.020 

56.171.645 

57.890.285 

59.877.486 

57.052.274 

61.984.976 

63%

12%

211%

-23%

-39%

34%

-16%

24%

30%

56%

-2%

-21%

137%

176%

na

-11%

43%

-18%

-53%

18%

-22%

-37%

105%

-10%

21%

1560%

na

12%

-23% 

10% 

DE**: excluding pre-portioned tobacco  
BE, CY, FI, ET, EL, LV, LU, LT, BG, SE: including other smoking CZ*: From July 2005 the figures indicate the total quantity of 
other smoking tobacco and fine-cut tobacco together. 

EN 

16 

   EN