Commission staff working document - Accompanying the Proposal for a Council Directive amending Council Directive 95/59/EC, 92/79/EEC and 92/80/EEC on the structure and the rates of excise duty applied to manufactured tobacco - Impact assessment summary {COM(2008) 459 final} {SEC(2008) 2266}
Date: 2008-07-16
Institutions: European Commission
Subjects: excise duty, tax harmonisation, tax on consumption, tobacco, tobacco industry

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 16.7.2008 
SEC(2008) 2267 

COMMISSION STAFF WORKING DOCUMENT 

Accompanying the 

Proposal for a 

COUNCIL DIRECTIVE 

amending Council directive 95/59/EC, 92/79/EEC and 92/80/EEC on the structure and  
the rates of excise duty applied to manufactured tobacco 

IMPACT ASSESSMENT SUMMARY 

{COM(2008) 459 final} 
{SEC(2008) 2266} 

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Summary 

Commission staff working document accompanying the Proposal for a Council Directive 
amending Council Directives 95/59/EC, 92/79/EEC and 92/80/EEC on the structure and 
the rates of excise duty applied to manufactured tobacco. 

The  Commission  services  made  an  impact  assessment  focusing  on  potential  measures  that 
could  modernise  or  add  more  transparency  to  the  structure  of  excise  duties  on  tobacco 
products. In addition, particular attention was paid to the relationship between public health 
and  the  final  price  of  the  products,  taking  stock  of  the  WHO  Framework  Convention  on 
Tobacco Control, as well as to the options to bring the structure and the rates of excise duties 
for fine-cut smoking tobacco ("roll-your-own"), into line with excise duties for cigarettes. 

A  broad  consultation  process  preceded  this  impact  assesment.  Associations  and  other 
stakeholders  (trade,  health,  etc.)  were  invited  to  submit  position  papers  via  a  public  web- 
consultation.  

In order to examine how the different objectives for tobacco taxation could be addressed, the 
Commission assessed four basic approaches. 

The  first  approach  consists  of  not  intervening  further  at  Community  level  (the  no  policy 
change  option).  This  approach  will  not  solve  the  problem  of  distortions  of  cross-border 
shopping and smuggling currently existing on the tobacco market, which has consequences in 
terms and revenue and health protection.  

In addition, it will not resolve the fiscal instability and distortions of competition which are 
currently created by the most popular price category (MPPC) concept. It will also not address 
the problem of substitution and tax induced distortions of competition between the different 
products of manufactured tobacco. It was therefore not an option that the Commission chose 
to pursue. 

The  second  approach  option  consists  of  changing  only  the  structure  of  excise  duties  on 
cigarettes.  In  order  to  resolve  the  problems  which  are  currently  created  by  the  MPPC 
concept, the Impact assessment examines abolishing the concept of the MPPC as benchmark 
for minimum requirements. Currently excise duties must be at least 57% of the tax inclusive 
retail price and at least €64 pe r 1000 cigarettes of the MPPC. Instead, the Impact assessment 
examines two alternatives: a) applying the EU minimum requirements of 57% and €64 to all 
cigarettes  or  b)  applying  the  minimum  requirements  in  accordance  with  weighted  average 
prices (WAP). Simultaneously the impact is assessed of providing more flexibility to Member 
States as concerns the structure of the excise duties at national level. 

Both  alternatives  would  simplify  the  arrangements  as  compared  to  the  current  situation. 
Neither applying minimum requirements on all cigarettes or on WAP would entail an increase 
of administrative  costs for any  of the  stakeholders. Both alternatives would  also  resolve the 
problem of the fiscal instability and distortions of competition which are currently created by 
the  MPPC  concept.  However  only  applying  the  minimum  of  €64  on  all  cigarettes  would 
create  a  tax  floor  for  all  cigarettes  in  the  EU.  It  would  also  reduce  the  tax  and  price  gap 
between Member States more than the other options and, to an appreciable extent, integrate 
public  health  concerns.  Therefore  this  option  gets  priority  from  an  internal  market  and  a 

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health point of view. However, applying the 57% rule on all cigarettes would for a number of 
Member States result in a compulsory ad valorem duty and not be in line with the objective to 
provide  more  flexibility  to  Member  States  as  concerns  the  relation  specific  and  ad-valorem 
duties. Therefore applying the 57% rule on WAP is the favoured option. 

The second approach would, however, not sufficiently take account of health considerations.  

The  third  approach  consists  of  increasing  the  minimum  rates  of  excise  duties  on 
cigarettes  (in  addition  to  changes  to  the  structure).  The  Impact  assessment  simulated  a 
number of increases of the minimum rates of excise duties on cigarettes, either the 57% or the 
minimum of €64 per 1000 cigarettes. It conclude s that an increase of the monetary minimum 
of €64 is the best instrument to achieve approxima tion of taxes and prices of cigarettes in the 
EU  in  the  interest  of  the  Internal  market  and  with  a  view  to  tobacco  control.  However  an 
increase  of  the  monetary  minimum  should  be  combined  with  an  increase  of  the  57% 
minimum requirement, which would require an update of the  escape clause, currently set at 
€101 (when the excise duty is at  least €101 on the MPPC memb er States do not any longer 
have  to  comply  with  the  57%  requirement).  An  update  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 five highest taxing Member States.  

Over the last five years the consumption of cigarettes in the EU declined by more than 10%. 
In the same period the excise duties have increased by more than 30%. 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.  A  10% 
reduction  over  a  period  of  5  years  would  also  be  inline  with  the  European  Strategy  for 
Tobacco Control" (ECTC), adopted by the Regional Committee for WHO Europe which sets 
as the principal target to bring smoking prevalence down by 2% per year.  

In view of the above, the Commission has considered a number of possible increases. 

An increase to €90 on all cigarettes and 63%  on WAP would trigger a probable decrease of 
demand  of  on  average  10%  in  22  Member  States1.  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.  Apart  from  BG  and  RO  it  would  not  render  prices  extremely 
expensive as compared to the local purchasing power in the Member States. 

All  in  all,  in  the  field  of  cigarettes,  this  approach  appears  best  suited  to  ensure  the  proper 
functioning of the Internal Market and, at the same time, a high level of health protection. 

The  fourth  approach  consists  of  changing  the  structures  and  minimum  rates  of  excise 
duties  on  other  products,  in  particular  fine-cut  tobacco,  in  order  to  avoid  substitution  of 
cigarettes by less taxed tobacco products. 

The  substantial  differences  in  tax  levels  among  Member  States  on  fine-cut  tobacco  entail 
smuggling and cross border shopping between a number of neighbouring countries and give 
rise to distortions in the internal market. In addition, the gap between the level of taxation of 
cigarettes and fine-cut tobacco gives rise to substitution. Official releases for consumption of 
cigarettes in the EU 27 decreased during 2002-2006 by around 13%. Conversely, the releases 

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Not in DE, UK, IE, FR (and RO was not included in the simulation) 

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for consumption of fine cut tobacco increased by around 10%. There is little justification for 
significant  differences  in  the  minimum  rates  for  these  products  at  Community  level.  This 
applies  both  in  a  perspective  of  fair  competition  and,  given  the  harmful  character  of  both 
products,  from  a  health  point  of  view.  Therefore  the  minimum  rates  for  fine-cut  tobacco 
intended for the rolling of cigarettes should be brought into line with the rate for cigarettes. 

For  fine-cut  Member  States  may  choose  between  complying  with  a  monetary  or  an  ad 
valorem  minimum  rate.  However  since  the  monetary  minimum  requirement  is  the  best 
approximating  factor,  there  should  be  (in  addition  to  the  ad  valorem  minimum  rate  a 
compulsory monetary minimum rate for all Member States, as for cigarettes. 

Taking  account  of  the  specific  characteristics  of  fine  cut  tobacco,  the  previous  Commission 
report stated the minimum excise for fine-cut tobacco could be fixed at about two thirds of the 
minimum excise incidence for cigarettes. In order to respect a two thirds relationship between 
fine-cut  and  cigarettes,  the  monetary  minimum  requirement  should  be  fixed  at  €43  per 
kilogram and the proportional minimum requirement at 38%.  

Applying the aforementioned 2:3 relationship on the suggested increases for cigarettes, would 
increase the minimum rates for fine cut to €60  and 42% over a period of five years. Assuming 
the  same  price-elasticity  as  for  cigarettes,  an  increase  of  the  minimum  requirements  to  €60 
and 42% would trigger a reduction in demand of around 20% in 19 Member States. 

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