Study on the measuring and reducing of administrative costs for economic operators and tax authorities and obtaining in parallel a higher level of compliance and security in imposing excise duties on tobacco products.
Date: 2015-07-02
Institutions: Directorate-General for Taxation and Customs Union
Subjects: administrative expenditure, excise duty, manufactured goods, tax harmonisation, tobacco, tobacco industry

Study on the measuring and reducing 
of administrative costs for economic 
operators and tax authorities and 
obtaining in parallel a higher level of 
compliance and security in imposing 
excise duties on tobacco products 

TAXUD/2012/DE/341 
Specific contract No 4 under FWC 
TAXUD/2012/CC116 

mmm 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

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Revision 
Date 

3 
12.09.2014 

PREPARED BY:  

Henrik Stener Pedersen; Alexandru Floristean; Lorenzo Iseppi; Ross Dawkins; Chris 
Smith; Christina Mørup; Helene Bundgaard Rohde; Sida Yin; Peter Schoen; Xavier Le 
Den 
Dr. Thomas Bieber; Dr. Walter Summersberger 
Henrik Rosenberg Seiding 
Final Report 

Checked by 
Approved by 
Version 

FOR THE EUROPEAN COMMISSION: 

Directorate-General for Taxation and the Customs Union (DG TAXUD) 
Directorate C — Indirect Taxation and Tax Administration 
Unit C2 — Indirect taxes other than VAT 

LEGAL NOTICE 

This document has been prepared for the European Commission however it reflects the views only of the 
authors, and the Commission cannot be held responsible for any use which may be made of the information 
contained therein. 

More information on the European Union is available on the Internet (http://www.europa.eu). 
Luxembourg: Publications Office of the European Union, 2014 

ISBN 978-92-79-40964-6 
doi: 10.2778/497376 

© European Union, 2014  
Reproduction is authorised provided the source is acknowledged. 

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Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

Table of Contents 

Executive Summary ........................................................................................... 7 
Introduction ................................................................................................... 7 
Safeguarding Member States’ budgetary objectives ............................................. 8 
Extent  to  which  definitions  of  excisable  tobacco  products  enable  adequate 
collection of excise duties .............................................................................. 8 
Extent  to  which  definitions  of  excisable  tobacco  products  enable  monitoring, 
verification and authentication, and identify illicit trade, evasion and abuse in the 
Internal Market ............................................................................................ 9 
Ensuring the proper functioning of the internal market .......................................10 
Extent to which the rules on the MED allow neutral conditions of competition .....11 
Extent to which changes in trade patterns have been induced by changes in excise 
duty levels .................................................................................................11 
Extent to which the current rate structure guarantees the proper functioning of the 
internal market ...........................................................................................11 
The impact of derogations and exceptions on the Internal Market .....................12 
Extent to which non-harmonisation of anti-forestalling is detrimental to the proper 
functioning of the Internal Market .................................................................12 
Efficiency of the current arrangements .............................................................12 
Recommendations .........................................................................................13 
Definitions of excisable tobacco products .......................................................13 
Rates and structure of Excise duty ................................................................14 
Excise stamps and Track and Trace systems ...................................................14 
Introduction .....................................................................................................15 
Rationale, objectives and scope of the study .....................................................15 
Evaluation questions ......................................................................................15 
Content and structure of the report ...............................................................17 
Background .....................................................................................................19 
Council Directive 2008/118/EC ........................................................................19 
Council Directive 2011/64/EU ..........................................................................20 
The provisions for cigarettes .........................................................................21 
The minimum excise duty (MED) and the weighted average price (WAP)............21 
The provisions for tobacco products other than cigarettes ................................22 
Exemptions and derogations ...........................................................................22 
Other aspects of the taxation of tobacco products ..............................................23 
Excise Movement and Control System ...........................................................23 
Administrative cooperation and the exchange of information ............................24 
Track and trace systems ..............................................................................24 
Methodology ....................................................................................................26 
Phase 2.1 – Data collection I - Stakeholder consultation .....................................26 
Survey to Member States .............................................................................26 
Survey to Economic operators ......................................................................27 
Desk research and literature review ..............................................................27 
Phase 2.2: Data collection 2 (field study) ..........................................................28 
Objectives ..................................................................................................28 
Conducting case studies in selected Member States .........................................28 
The process ................................................................................................28 
Selection of countries and motivation for selection ..........................................29 
Phase 2.3: Data collection 3 (Euromonitor data) ................................................29 
Phase 3: Analysis and recommendations ..........................................................30 
Question  2:  To  what  extent  do  the  current  arrangements  for  tobacco  excise  duty  on 
tobacco products safeguard Member States' budgetary objectives? .........................31 

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Summary ......................................................................................................47 
Q2.1  To  what  extent  do  the  definitions  of  taxable  products  in  Articles  2-5  of 
Directive 2011/64/EU allow for adequate (correct categories and rates) collection  of 
the due excise duties for manufactured tobacco products? ..................................49 
Q2.1 (a) The treatment for excise purposes of tobacco products not defined by the 
Directive? ..................................................................................................49 
E-cigarettes .....................................................................................................53 
Definition ......................................................................................................53 
Market development ......................................................................................53 
Classification in EU .........................................................................................53 
Health concerns .............................................................................................53 
Characteristics of DIET tobacco (in detail) ......................................................54 
Q2.1  (b)  Reported  instances  of  tobacco  products  which  are  difficult  to  classify  or 
whose  classification  requires  subjective  interpretation  of  the  law  (borderline 
products) ...................................................................................................58 
Q2.1  (c)  Volume  /  quantity  of  products  whose  treatment  was  reported  to  be 
problematic ................................................................................................63 
Summary ...................................................................................................65 
Q2.2  To  what  extent  are  the  definitions  of  taxable  products  in  Articles  2-5  of 
Directive  2011/64/EU  appropriate 
to  enable  monitoring,  verification  and 
authentication, and identify illicit trade, evasion and abuse in the Internal Market? 67 
Q2.2 (a) The extent with which dual coding and classification of tobacco products 
for customs or excise duties purposes affect the capacity of the Member States to 
fight against avoidance or fraud ....................................................................67 
Q2.2  (b)  To  what  extent  current  definition  rules  and  implementation  thereof  are 
detrimental to other rules and mechanisms in application at EU level? ...............72 
Q2.2 (c) The extent to which the non-inclusion of certain tobacco products within 
the  framework  of  excisable  tobacco  products  affects  the  monitoring  and  control 
function? ....................................................................................................73 
Summary ...................................................................................................75 
Q2.3  How  does  the  treatment  of  products  not  defined  by  the  Directive  impact  the 
ability to perform monitoring of trade/ logistics of taxable tobacco products? ........76 
The Fiscal Treatment of raw tobacco ..............................................................76 
Q2.3 (a) The  extent to  which information on the logistics of raw tobacco is being 
generated in the context of the current systems? ............................................76 
Q2.3  (b)  To  what  extent  do  Member  States  systematically  collect  and  use 
monitoring data on raw tobacco ....................................................................79 
Q2.3 (c) To what extent do Member States consider that the current measures for 
controlling  the  logistics  of  raw  tobacco  impact  their  ability  to  monitor  excisable 
tobacco products ........................................................................................80 
Summary ...................................................................................................82 
Overall conclusions......................................................................................82 
Question  3:  To  what  extent  do  the  current  arrangements  for  excise  duty  on  tobacco 
products ensure the proper functioning of the Internal Market and avoid distortions in 
competition? ....................................................................................................83 
Q3.1 To what extent do the current rules on  MED (Minimum Excise Duty) allow for 
neutral  conditions  of  competition  and  the  proper  functioning  of  the  internal  market 
(avoiding distortion of competition or trade)? ....................................................83 
Quantitative analysis ...................................................................................87 
Summary ......................................................................................................95 
Q3.2 To what extent have changes in trade patterns been induced by changes in the 
tobacco excise duty levels? .............................................................................95 
Legal cross-border trade ............................................................................ 100 
Illicit trade ............................................................................................... 105 
Volume/value of the illicit trade in the EU ..................................................... 105 

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Factors contributing to illicit trade ............................................................... 105 
Summary .................................................................................................... 108 
Q3.3  To  what  extent  does  the  current  structure  and  rates  of  the  excise  duties  for 
manufactured tobacco guarantee the proper functioning of the Internal Market?.. 108 
All tobacco .................................................................................................. 108 
Ensuring the proper functioning of the Internal Market .................................. 109 
Neutral conditions of competition ................................................................ 110 
Free formation of prices ............................................................................. 112 
Market impacts ......................................................................................... 113 
Cigarettes ................................................................................................... 119 
Cigars ........................................................................................................ 124 
Cigarillos .................................................................................................... 128 
RYO Tobacco ............................................................................................... 131 
Pipe tobacco ................................................................................................ 135 
Summary .................................................................................................... 139 
Q3.4  What  is  the  impact  of  the  derogations  and  exceptions  granted  to/by  certain 
Member States/EU regions in application of the tobacco excise duties on the Internal 
Market; ...................................................................................................... 140 
Summary .................................................................................................... 142 
Q3.5  To  what  extent  non-harmonisation  of  anti-forestalling  measure  is  detrimental 
to the proper functioning of the Internal Market? ............................................. 142 
Current Measures ........................................................................................ 143 
Impacts of anti-forestalling measures on the Internal Market ............................ 144 
Harmonisation of anti-forestalling measures .................................................... 145 
Summary .................................................................................................... 145 
Overall Conclusions ...................................................................................... 146 
Question 4: To what extent are the current arrangements for excise duty on tobacco 
products implemented in a cost-effective way? ................................................... 147 
Q4.1 Are there any administrative tasks, monitoring or control procedures that could 
be improved in order to achieve a high level of efficiency for the tax authorities (i.e. 
in terms of administrative costs)? .................................................................. 147 
Pre-authorisation of economic operators ...................................................... 147 
Production/Holding/Storing of tobacco products ............................................ 148 
Trade and logistics of tobacco products ........................................................ 149 
Definitions and classification ....................................................................... 150 
Dual coding .............................................................................................. 153 
Summary ................................................................................................. 155 
Q4.2 Are there any administrative tasks, monitoring or control procedures that could 
be  improved  in  order  to  achieve  a  high  level  of  efficiency  for  economic  operators 
(compliance costs)? ..................................................................................... 155 
Pre-authorisation of economic operators ...................................................... 155 
Production/Holding/Storing of tobacco products ............................................ 158 
Trade and logistics of tobacco products ........................................................ 159 
Definitions and classification ....................................................................... 162 
Dual coding .............................................................................................. 165 
Summary ................................................................................................. 167 
Overall conclusions.................................................................................... 167 
Recommendations .......................................................................................... 169 
Definitions of excisable tobacco products ........................................................ 169 
Rates and structure of Excise duty ................................................................. 172 
Excise stamps and Track and Trace systems ................................................... 173 
Other ......................................................................................................... 174 
Appendix 1 – Evaluation Matrix and Evaluation Design ........................................ 175 
Appendix 2 – Questionnaire to Member States ................................................... 176 
Appendix 3 – Survey Questionnaire to Economic Operators .................................. 177 

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Appendix 4 – Analysis of survey data from economic operators ............................ 178 
Appendix 5 – Question 1: Background Information ............................................. 179 
Q.1.1  What  is  the  structure  of  the  excise  duty  applied  in  each  Member  State, 
inclusive of the minimum excise duty? ............................................................ 179 
Cigarettes ................................................................................................... 179 
The specific component ............................................................................. 180 
The minimum excise duty (MED) ................................................................. 182 
The overall excise duty burden ................................................................... 183 
Manufactured tobacco other than cigarettes .................................................... 185 
Cigars/Cigarillos ........................................................................................ 185 
Fine-cut tobacco for rolling of cigarettes ...................................................... 186 
Other smoking tobacco .............................................................................. 188 
Summary .................................................................................................... 189 
Q.1.2 What are the main features of the tobacco taxation collection systems? ..... 190 
Periodical reporting on the excise duty debt .................................................... 190 
Refund of excise duties for damaged/returned/destroyed products..................... 191 
Tax markings .............................................................................................. 191 
Scope of the marking system ..................................................................... 191 
Features of tax markings ........................................................................... 192 
Acquisition of tax markings ........................................................................ 193 
Payment of excise duty ................................................................................ 194 
Summary .................................................................................................... 195 
Q.1.3  What  licencing  and  authorisation  apply  to  operators  involved  in  the  tobacco 
supply chain? .............................................................................................. 195 
Products not defined in the Directive .............................................................. 196 
Products explicitly defined in the Directive ...................................................... 197 
Gaining an authorisation ............................................................................ 198 
After obtaining the authorisation ................................................................. 201 
Summary .................................................................................................... 202 
Q1.4 What are the processes / activities performed by Member States authorities to 
ensure  the  collection  of  tax  revenue  (e.g.  in  terms  of  monitoring,  tax  assessment, 
collection, authentication and verification, auditing, etc.)? ................................ 202 
Authorisation ............................................................................................... 203 
Record keeping and reporting ........................................................................ 203 
Fiscal markings ............................................................................................ 205 
Financial securities ....................................................................................... 205 
Physical inspections and checks ..................................................................... 205 
Summary .................................................................................................... 206 
Q1.5  What  IT  technologies  are  used  by  tax  authorities  to  combat  illicit  trade  and 
ensure the collection of tax revenue? ............................................................. 207 
Data sources ............................................................................................... 207 
From raw data to intelligence ........................................................................ 209 
Tax marking system and track and trace systems ............................................ 211 
Summary .................................................................................................... 213 
Appendix 6 – Research note on e-cigarettes ....................................................... 214 
Appendix  7  –  Analysis  of  products  whose  classification  requires  subjective 
interpretation of the law .................................................................................. 226 
Appendix 8 – Overview of national definitions and treatment of raw tobacco .......... 231 
Appendix 9 – Bibliography ............................................................................... 236 

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Executive Summary 

Introduction 
In  the  context  of  its  obligation  to  make  regular  reports  on  tobacco  taxation1,  the 
Commission  is  aiming  to  revise  the  main  legislative  acts  in  order  to  generate  a 
reduction  of  administrative  expenses  for  tax  administrations  and  economic  operators 
while  increasing  the  level  of  compliance  and  security  in  applying  excise  duties  on 
tobacco  products  and  protecting  Member  States'  budgetary  interests.  The  present 
study aims at evaluating the current EU legislation imposing excise duties on tobacco 
products (Council Directive 2011/64/EU). 

To  this  purpose,  the  study  maps  the  main  characteristics  of  the  national  excise 
systems  for  tobacco  products,  within  the  framework  of  the  two  main  directives 2 
regulating  excise  duties,  and  excise  duties  on  tobacco  in  particular.  It  then  assesses 
the  effectiveness  of  the  EU  excise  duty  system  for  tobacco  products  in  terms  of  its 
capacity  to  safeguard  Member  States'  budgetary  objectives,  and  ensure  the  proper 
functioning of the Internal Market while avoiding distortions in competition.  

Using  a  case-study  approach,  the  study  goes  further  in  depth  into  a  number  of 
selected  issues,  while  also  assessing  the  administrative  and  compliance  costs  of 
implementing  and  complying  with  some  elements  of  the  legislation.  A  final,  cross-
country  analysis  has  enabled  the  identification  of  good  practices  while  enabling  the 
formulation of recommendations. The main evaluation questions are presented below: 

Table 1, Evaluation Questions 

Evaluation Questions 
Question  1.  Background:  What  are  the  current  arrangements  for  the  collection  of 
excise duty on tobacco products in the Member States? 
Question  2:  To  what  extent  do  the  current  arrangements  for  tobacco  excise  duty  on 
tobacco products safeguard Member States' budgetary objectives? 
Question  3:  To  what  extent  do  the  current  arrangements  for  excise  duty  on  tobacco 
products ensure the proper functioning of the Internal Market and avoid distortions in 
competition? 
Question 4: To what extent are the current arrangements for excise duty on tobacco 
products implemented in a cost-effective way? 
Recommendations 
In order to appropriately answer these questions, the study has completed: 

  A broad consultation of Member States administrations3. 
  An online survey of economic operators. 
  Field  measurements  in  six4  Member  States,  including  visits  to  both  authorities 

and economic operators. 

  Qualitative analysis of existing legislation, past studies and economic literature. 
  Quantitative analysis of economic data. 

1  According  to  Article  45  of  Directive  2008/118/EC,  By  1  April  2015,  the  Commission  shall  submit  to  the 
European Parliament and the Council a report on the implementation of this Directive.  While according to 
Article 19  of  Directive  2011/64/EU,  every four years,  the Commission  shall  submit  to  the  Council  a report 
and, where appropriate, a proposal concerning the rates and the structure of excise duty laid down in this 
Directive. 
2 Directive 2011/64/EU and Directive 2008/118/EC 
3 27 out of 28 Member States have provided detailed responses to the study questions 
4  Denmark, Finland, Greece, Poland, Romania and the United Kingdom; an additional case study has been 
conducted  in  Germany;  however  this  has  been  achieved  mainly  through  phone  interviews  and  desk 
research. 

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Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

Safeguarding Member States’ budgetary objectives 
The amount of duty that tax administrations lose to illicit trade is about €11.1 billion.  
However  illicit  tobacco  prices  are  below  retail  prices.    This  means  that  if  illicit 
consumption  was  eliminated  total  tobacco  consumption  would  fall  as  consumers 
previously buying illicit products would face higher prices.  The realisable level of duty 
figure,  after  adjusting  for  such  volume  changes,  is  estimated  in  the  range  of  €6.1 
billion to €7.2 billion per annum. If the illicit cigarette-buying population is more price 
sensitive than the average population, then the  realisable values could be lower than 
this.  On the other hand, inclusion of other drivers of duty loss (e.g. misclassification) 
would drive the gap upwards.  If illicit trade is assumed to be absent from all products 
bar cigarettes then this range would be €5.7–€6.7 billion. 

Extent to which definitions of excisable tobacco products enable adequate collection of 
excise duties 

With a number of exceptions, which are detailed below, this evaluation concludes that, 
overall,  the  definitions  of  Art  2-5  Directive  2011/64/EU  have  proven  to  be  effective 
and  are  generally  appropriate  for  enabling  adequate  (correct  categories  and  rates) 
collection of excise duties for the large majority of manufactured tobacco products. 

A number of key findings qualifying the conclusion above are, however, necessary: 

  At  the  moment,  EU  excise  duty  legislation  does  not  consider  e-cigarettes  to  be 
an  excisable  tobacco  product.  In  light  of  the  growing  consumption  of  e-
cigarettes,  as  a  substitute  to  excisable  tobacco  products,  the  long  term 
budgetary  implications  of  not  including  e-cigarettes  within  the  framework  of 
harmonised excise duties may prove to be significant. 

  The  current  formulation  of  Art  4  (1)  of  the  Directive  contains  both  objective  as 
well as subjective criteria for classifying a tobacco product as a cigar/cigarillo for 
excise duty purposes.  Even though the interpretation of these criteria lie at the 
heart  of  existing  disputes,  differences  in  the  level  of  taxation  between  excise 
duty categories are being credited as a driving factor in the reported emergence 
of so called “borderline”5 products, particularly those seeking to take advantage 
of the lower levels of taxation of cigars/cigarillos. 

  Even  though  the  size  of  the  cigarillos  market  (of  which  most  ‘borderline’ 
products are a subset of) is relatively small when compared to the total market 
of  excisable  tobacco  products,  the  hypothetical  budgetary  implication  of 
misclassification  on  some  of  the  individual  countries  which  have  reported 
problems may be significant.6 

  The  current  definition  of  Art  5(1)  (a)  and  specifically,  the  wording  of  “without 
further  industrial  processing”,  appears  not  to  be  appropriate  in  light  of  giving 
sufficient  legal  clarity  for  the  inclusion  of  a  number  of  products  which  arguably 
can be smoked as smoking tobacco. This includes products such as raw tobacco, 
partially  processed  tobacco,  dried  leaves  and  other  types  of  tobacco  which  are 
reported  to  being  sold  directly  to  consumers.  However,  in  the  absence  of 
measures  of  monitoring  and  control,  it  was  not  possible  to  adequately  quantify 
the resulting revenue impact.  

5  Tobacco  products  which  arguably  fulfil  the  minimum  criteria  for  inclusion  in  one  excise  tax  category  but 
whose classification is disputed or called into question by tax authorities on the basis of their properties and 
normal consumer expectations. 
6  Potential  revenue  losses  caused  by  potential  misclassification  are  not  included  in  the  excise  duty  gap 
calculation and would add to the total value. 

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Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

  Due  to  the  fact  that  Art  5  (1)  (a)  represents  a  catch-all  category,  its  main 
purpose  is  to  enable  the  taxation  of  tobacco  products  that  are  not  specifically 
defined  in  the  other  articles,  this  evaluation  has  found  that  this  purpose  is 
adequately  fulfilled  in  the  case  of  water-pipe  tobacco,  however  products  in  this 
category generally exhibit characteristics which are very different than the ones 
of  water-pipe  tobacco,  meaning  that:  applying  the  same  rate  to  water-pipe 
tobacco  may  lead  to  (a)  water-pipe  tobacco  being  over  taxed,  pushing 
consumption  towards  the  illicit  market,  or  (b)  other  types  of  products  in  the 
category  being  under-taxed,  leading  to  potential  revenue  losses  and  harmful 
tax-induced price advantages. 

  In the current definition of Art 5(1) (b) “put up for retail sale and which can be 
smoked”,  the  treatment  of  bulk  tobacco  refuse  put  up  for  sale  is  unclear.  In 
order  to  remove  this  legal  uncertainty  it  has  been  suggested  to  remove  the 
wording “retail” from the definition. 

Extent  to  which  definitions  of  excisable  tobacco  products  enable  monitoring, 
verification  and  authentication,  and  identify  illicit  trade,  evasion  and  abuse  in  the 
Internal Market 

As currently formulated, the definitions of Art 2-5 are not fully appropriate in light of 
enabling effective and efficient monitoring of excisable tobacco products.  

The  findings  of  this  evaluation  have  shown  that  the  EMCS  and  the  mechanism  of 
administrative cooperation and exchange of information are key elements in the fight 
against tax fraud. Additionally, Member State administrations have pointed out that it 
is  not  possible  to  use  administrative  cooperation  of  the  Council  Regulation  (EU) 
389/2012 for products not monitored via EMCS. 

As  a  result  of  this,  any  negative  influence  that  the  current  definitions  of  excisable 
tobacco product has on the functioning of those systems will decrease the capacity of 
Member States to monitor the logistics of excisable tobacco products, fight illicit trade, 
abuse and fraud. 

There  are  two  different  ways  in  which  the  functioning  of  the  system  is  negatively 
affected: The first stems from the inconsistent treatment of certain excisable tobacco 
products  across  the  Member  States.  The  second  manner  in  which  the  system  is 
negatively affected results from the limitation of scope of the Directive, which excludes 
certain tobacco  products (raw tobacco in particular), from the definitions of  excisable 
tobacco products and hence from the scope of the EMCS. 

With  respect  to  the  former  issue,  this  evaluation  has  found  that  the  inconsistent 
inclusion  of  a  number  of  tobacco  raw  materials,  intermediaries  or  by-products  within 
the  scope  of  the  EMCS  and  the  administrative  cooperation,  negatively  affects  the 
capacity  of  Member  States  to  monitor  and  control  the  logistics  of  excisable  tobacco 
products  and  fight  illicit  fraud.  While  not  necessarily  causing  the  inconsistent 
treatment, the dual classification7 of tobacco products for excise and customs purposes 
exacerbates  the  legal  uncertainty  around  the  treatment  of  certain  products  whose 
classification  as  excisable  is  contested.  This  effect  is  mostly  present  with  respect  to 
products  belonging  to  CN  classifications  which  include  both  excisable  as  well  as  non-
excisable  tobacco  products.  In  certain  cases,  it  also  regards  products  whose  tariff 

7  Despite  the fact  that,  from a  legal perspective,  the  treatment  of  tobacco products for excise purposes is 
not  bound  by  the  treatment  of  the  product  for  customs  purposes,  due  to  the  various  processes  of 
classification and monitoring, and indirect link between the two exists de facto 

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Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

classification (and accompanying explanatory notes) is inconsistent with the definitions 
of the Directive. 

Our  analysis  of  the  extent  to  which  the  treatment  of  products  not  defined  by  the 
Directive  impacts  the  ability  to  perform  monitoring  of  trade/  logistics  of  taxable 
tobacco products suggests the following conclusions: 

  Member  States  have  reported  that  raw  tobacco  is  diverted  from  the  “legal” 
supply  chain  and  used  in  the  large  and  medium  scale  production  of  excisable 
tobacco  products  outside  the  premises  of  an  authorised  warehouse  keeper, 
hence away from the control mechanisms of Member States  

  Despite the lack of mechanisms in place to adequately quantify the amounts of 
raw  tobacco  diverted  into  the  illegal  supply  chain,  the  quantification  of  illicit 
trade,  as  included  in  the  excise  duty  gap  section  of  this  report,  includes 
“contraband”  (i.e.  fake)  as  well  as  non-duty-paid  (NDP)  products.  Quantities  of 
raw  tobacco  diverted  from  the  legal  circuit  will  serve  as  raw  materials  to  the 
“contraband” part of illicit trade and are included in the calculation of the excise 
duty gap 

  Systematic, real-time data and information on the logistics of raw tobacco would 
increase  the  ability  of  Member  States  to  fight  illicit  trade  and  increase  their 
capacity to fight against criminal organizations involved in the illicit production of 
excisable tobacco products 

  The  current  arrangements  for  regulating  the  movements  and  logistics  of  raw 
tobacco  applicable  at  national8,  EU  or  international level  are  unable  to  generate 
systematic, real-time data in electronic format; as such they are not suitable for 
use in risk assessments and the targeting of control measures in a cost-effective 
manner. 

  Any  systematic  monitoring  of  raw  tobacco  across  the  EU  is  not  possible  in  the 
absence of a unified definition of what constitutes raw tobacco for the purpose of 
attaining the objectives of excise duty legislation. 

As  a  result,  on  the  final  point,  this  evaluation  concludes  that  the  absence  of 
systematic,  real-time  monitoring  of  raw  tobacco  across  the  EU  has  a  strong  negative 
impact  on  the  ability  of  Member  States  to  perform  monitoring  of  the  logistics  of 
excisable tobacco products and fight against illicit production and trade. 

Ensuring the proper functioning of the internal market 
Overall, we find that the current arrangements for excise duty on tobacco products do 
not  fully  ensure  the  proper  functioning  of  the  Internal  Market,  mainly  due  to  the 
impact  of  the  differentiated  application  of  the  rules  regarding  the  Minimum  Excise 
Duty  (MED)9;  the  inconsistent  treatment  of  a  number  of  tobacco  products  and  of  e-
cigarettes  and  the  tax  induced  substitution  between  and  within  product  groups.  The 
lack  of  harmonisation  of  anti-forestalling  measures10  also  somewhat  hinders  the 
functioning  of  Internal  Market.  Full  harmonisation  of  anti-forestalling  measures, 
however, is seen to be neither feasible nor welcome by Member States. 

8  Only  two  countries  (SK  and  HU)  have  reported  to  collect  systematic,  real-time  data  on  the  production, 
movement and overall logistics of raw tobacco. 
9 Minimum Excise duty, as regulated by Art 7 (4) and 8 (6) of Directive 2011/64/EU 
10 Anti-forestalling measures are certain legislative or administrative measures which aim to limit to ability 
of  economic  operators  to  take  advantage  of  the  lesser  duty  rates  before  a  planned  duty  change,  for 
example,  by  releasing  for  consumption  large  quantities  of  excisable  tobacco  products  in  periods  before  a 
duty change is known or expected to occur) 

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With  those  exceptions,  this  evaluation  has  concluded  that  the  current  structure  and 
rates  generally  allow  for  neutral  conditions  of  competition  and  the  free  formation  of 
prices and has found no clear evidence of changes in trade patterns being induced by 
recent changes in the tobacco excise duty levels. 

Derogations  and  exceptions  are  found  to  have  a  limited  impact  on  cross-border 
shopping and illicit trade.   

Extent to which the rules on the MED11 allow neutral conditions of competition  

The MED is applied only in certain Member States and its level differs significantly.  It 
affects  the  relative  price  of  economy  cigarettes  and  affects  relative  prices  between 
Member States. 

Given  the  various  interpretations  given  by  Member  States  with  respect  to  the 
limitations  of  the  MED,  the  nature  of  the  MED  and  the  applicable  rules  regarding  its 
use  do  not  seem  to  be  clear,  despite  the  Commission  having  answered  a  request  for 
clarification. 

There is evidence to suggest that the implementation of the MED has affected neutral 
conditions of competition (by distorting relative prices of different types of cigarettes) 
and  the  proper  functioning  of  the  internal  market  (by  affecting  some  countries  to  a 
greater  extent  than  others).  However,  as  the  market  share  of  economy  cigarettes  in 
the EU has increased over time, this evaluation concludes that the negative influence 
of the MED is most likely offset by other factors. 

Extent  to  which  changes  in  trade  patterns  have  been  induced  by  changes  in  excise 
duty levels 

Our  analysis  of  the  extent  to  which  changes  in  trade  patterns  have  been  induced  by 
changes in the tobacco excise duty levels provides the following key findings: 

  Changes in excise duties only affect trade patterns via the impact on retail prices 
– if excise duties were absorbed by manufacturers there would be no impact on 
trade; 

  Duty  changes  are  generally  fully  passed  through  to  consumers  and  both 
economic  operators  and  tax  administrations  believe  that  this  has  led  to  excise 
duty shopping by consumers and increased levels of illicit trade; 

  The incentive for excise duty shopping has changed somewhat over time but the 

impact on trade cannot be identified by economic data; 

  Changes in excise duties have almost no impact on the choice of manufacturing 

location; 

  Illicit trade is often more affected by abrupt changes in excise duty rates than by 
the  actual  level  at  which  it  is  set.  Illicit  trade,  once  established,  declines  very 
slowly and is difficult to reduce. 

Extent  to  which  the  current  rate  structure  guarantees  the  proper  functioning  of  the 
internal market 

Our analysis of the extent to which the current structure and rates of the excise duties 
for  manufactured  tobacco  guarantee  the  proper  functioning  of  the  Internal  Market 
suggests the following conclusions: 

11 Minimum Excise duty, as regulated by Art 7 (4) and 8 (6) of Directive 2011/64/EU 

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  The  current  structure  and  rates  are  generally  considered  to  allow  for  neutral 
conditions of competition and the free formation of prices, although the MED is 
considered by some stakeholders to place a constraint on these; 

  Changes in the level of excise duties can lead to substitution both within a given 
type of tobacco product (e.g.  from premium to economy brands, or vice  versa) 
and  between  different  types  of  tobacco  products  (e.g.  from  cigarettes  to  Roll 
your  own  (RYO)  tobacco  or  vice  versa).  Many  other  factors  affect  demand  for 
tobacco  products  (e.g.  household  incomes)  and  these  influences  can  dominate 
excise duty changes; 

  Impacts  do  not  seem  to  differ  significantly  between  manufacturers  as  all 
manufacturers will adjust their product portfolios in line with demand (e.g. many 
manufacturers are currently entering the market for  e-cigarettes in response to 
increased demand for this product). 

The impact of derogations and exceptions on the Internal Market 

Our  analysis  of  the  impact  of  derogations  and  exceptions  has  identified  the  following 
key results: 

  There  are  mixed  feelings  amongst  tax  administrations  and  economic  operators 

concerning the impact of derogations and exceptions; 

  Those  respondents  that  considered  that  there  is  a  non-trivial  impact  of 
derogations  and  exceptions  highlighted  cross-border  shopping,  illicit  trade  / 
smuggling,  classification  uncertainty  and  ease  of  adaptation  to  be  the  key 
impacts. 

Extent  to  which  non-harmonisation  of  anti-forestalling  is  detrimental  to  the  proper 
functioning of the Internal Market 

Our  assessment  of  the  extent  to  which  non-harmonisation  of  anti-forestalling 
measures  is  detrimental  to  the  proper  functioning  of  the  Internal  Market  has  found 
that: 

  A wide range of measures are currently in place across the EU; 

  The measures in place are considered to be beneficial by tax administrations and 
some  economic  operators  but  other  economic  operators  feel  that  the  measures 
are not effective. 

  The lack of harmonization is perceived to somewhat hinder the functioning of the 
single  market  but  there  is  little  call  for  harmonization  by  either  tax 
administrations  or  some  economic  operators.  Full  harmonization  is  not 
considered  feasible  in  the  absence  of  harmonization  of  tax  collection  systems 
(e.g. tax stamps, fiscal markings, etc.). 

Efficiency of the current arrangements 
The analysis of the administrative and compliance costs borne by tax administrations 
and  economic  operators  indicates  that  the  greatest  negative  impact  stems  from  the 
current  definitions  as  laid  down  in  Directive/2011/64  and  in  the  existence  of 
inconsistencies  between  them  and  the  Explanatory  Notes  to  the  CN.  In  both  cases 
efficiency is negatively affected by the increase in the operating costs. 

The  analysis  shows  that  the  primary  driver  is  represented  by  legal  uncertainty  over 
the treatment of specific products.  

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Even though the costs at a systemic level are (still) relatively small as disputed cases 
concern  niche  products,  the  impact  on  the  single  business/tax  administration  can  be 
significant.  In  the  case  of  the  tax  administration,  resources  need  to  be  spent  on 
dealing with the dispute thus they are diverted from other tasks.  

From the perspective of the economic operator, the direct costs of preparing the case 
(e.g. legal opinions) add up to more indirect costs such as the forgone revenues for a 
delayed launch of the product, financial distress, etc. 

Additionally, the application of differentiated definitions of tobacco products for excise 
duty  and  for  customs  purposes  is  considered  to  be  problematic  as  it  translates  into 
double  entries  and  legal  uncertainty  for  smaller  operators.  Larger  manufacturers  on 
the contrary, did not report problems, the reason likely being that they use advanced 
IT platforms which automate the process of dealing with EMCS and coding. 
One  area  of  significant  potential  reduction  of  costs  regards  the  compliance  with  the 
requirements  of  economic  operators  with  excise  stamp  obligations,  and  in  particular, 
with the rules regarding the proof of destruction in light of recovering excise duty due 
for products which became unfit for consumption or for tax stamps which were never 
applied  to  products.  This  finding,  however,  relates  to  national  measures  applied  at 
Member State level. EU legislation allows the use of tax stamps but does not regulate 
the procedures which are applicable. 

Recommendations  
In  line  with  the  objectives  of  the  current  legislation  on  tobacco  taxation,  the 
recommendations presented in the context of this study aim to: 

  Safeguard the budgetary interest of MS 

  Ensure proper functioning of the internal market 

  Promote the efficient working of both tax authorities and economic operators 

The main domains found to have the greatest potential for improvement relate to the 
definitions  of  excisable  tobacco  products,  duty  rates  and  tax  structure  and  fiscal 
marks.  The  executive  summary  reproduces  the  most  important  recommendations  in 
these domains. 

Definitions of excisable tobacco products 

The  revision  of  Art  2-5  of  Directive  2011/64/EU,  which  defines  excisable  tobacco 
products  has  the  potential  to  bring  significant  improvements  to  the  effectiveness 
(safeguarding  budgetary  interest  of  Member  States  and  improving  the  ability  of 
Member  States  to  control  the  logistics  and  monitoring  of  excisable  tobacco  products) 
as  well  as  the  efficiency  of  the  tax  collection  system.  In  this  area,  the  following 
recommendations are suggested: 

  The possibility of including e-cigarettes within the scope of the harmonised 
system of excise duty on tobacco products should be further investigated. 

  The possibility of introducing raw tobacco within the scope of monitoring of 

excisable tobacco products should be further considered in order to ensure that 
the data on the logistics of raw tobacco becomes available, in a systematic and 
comparable format across the territory of the EU. This recommendation, 

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however, may imply significant costs for tax administrations12 as well as the 
economic operators involved, for this reason, it is considered necessary for the 
aspect of cost to be adequately investigated and taken into account when 
deciding on further measures. 

  It is recommended that water-pipe tobacco be introduced in a separate tax 

category, allowing the imposition of an adequate rate in relation to the 
characteristics of the product. 

  Steps should be taken towards more objective criteria for classification. This 

recommendation could be achieved by describing excise categories with 
reference to the CN codes, as is the current practice with alcohol and mineral 
oils. 

Rates and structure of Excise duty 

It  is  recommended  to  align  minimum  excise  duty  taxes  (i.e.  through  a  mechanism 
similar to the MED on cigarettes13) of cigars/cigarillos to the minimum excise taxes on 
cigarettes. In order to eliminate the incentive to market “borderline” products, such a 
mechanism  does  not  need  to  go  beyond  the  objective  of  ensuring  that  the  same 
minimum  excise  tax  is  levied  per  unit  of  cigar/cigarillo  as  the  minimum  excise  tax 
levied  per  unit  of  cigarette.  This  recommendation  may  also  be  taken  up  individually, 
by Member States, which, under the existing arrangements can apply a minimum tax 
floor14 on cigars/cigarillos when using an ad valorem or mixed tax structure.  

This  evaluation  recommends  that  the  Commission  revises  the  rules  surrounding  the 
MED  on  cigarettes  to  provide  sufficient  legal  clarity  with  respect  to  the  upper  and 
lower limits at which it may be set. 

Excise stamps and Track and Trace systems 

In light of the evidence collected and presented in the context of this evaluation15, the 
complete  substitution  of  excise  stamps  by  track  and  trace  systems  is  not 
recommended at this moment.  

The measurement of administrative and compliance cost conducted has revealed that 
the  management  of  excise  stamps  imposes  significant  operating  costs  for  economic 
operators;  as  a  result  of  this,  the  continuous  development  of  the  track  and  trace 
systems  should  continue  to  be  within  the  focus  of  the  EU  Commission  and  Member 
States.  A  future  phasing  out  of  excise  stamps,  when  the  capabilities  and  features  of 
the systems will be, at minimum, on par with the expectations of the Member States 
in  terms  of  their  monitoring,  control  and  authentication  functions  should  be 
considered.  

12  E.g.  setting  up  the  legislative  framework,  increasing  administrative  capacity for  control  and  verification, 
upgrading IT systems, etc. 
13 The MED is allowed by Art 7(4) and 8 (6) of Directive 2011/64/EU 
14 Art 14. Directive 2011/64/EU 
15 As detailed in Appendix 5 – Question 1: Background Information, and specifically in Q1.2 

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Introduction 

Rationale, objectives and scope of the study 
In  the  context  of  the  obligation  to  make  regular  reports  on  tobacco  taxation 16,  the 
Commission  is  aiming  to  revise  the  main  legislative  acts  in  question  in  order  to 
generate a reduction of administrative expenses for tax administrations and economic 
operators  while  increasing  the  level  of  compliance  and  security  in  applying  excise 
duties  on  tobacco  products  and  protecting  Member  States'  budgetary  interests. 
Against  this  backdrop,  Directorate  General  Taxation  and  Customs  Union  (DG  TAXUD) 
has commissioned this study. 

The present study aims at evaluating the current EU legislation imposing excise duties 
on  tobacco  products  (Council  Directive  2011/64/EU).  This  evaluation  is  resolutely 
formative,  in  the  sense  that  it  should  facilitate  learning  in  order  to  help  improve  the 
legislation. The objective is to provide The Commission with the economic information 
to adopt a policy and assess the likely impact of this future policy for revising Directive 
2011/64/EU between 2014 and 2016. 

In this respect, the evaluation should: 

  Assess the extent to which Directive 2011/64/EU meets its objectives in terms of 
securing the revenues of tax administrations and ensuring the proper functioning 
of the internal market; 

  Identify issues that have the highest potential for efficiency gains in terms of 
securing the revenues of tax administrations and reducing administrative and 
compliance costs, while meeting the requirements for a proper functioning of the 
internal market; 

  Formulate recommendations, possibly based on good practices, on how best to 

address identified issues. 

To  this  purpose,  the  study  maps  the  main  characteristics  of  the  national  excise 
systems  for  tobacco  products,  within  the  framework  of  the  two  main  directives 17 
regulating  excise  duties,  and  excise  duties  on  tobacco  in  particular.  It  then  assesses 
the  effectiveness  of  the  EU  excise  duty  system  for  tobacco  products  in  terms  of  its 
capacity  to  safeguard  Member  States'  budgetary  objectives,  and  ensure  the  proper 
functioning of the Internal Market while avoiding distortions in competition.  

Using  a  case-study  approach,  the  study  goes  further  in  depth  into  a  number  of 
selected  issues,  while  also  assessing  the  administrative  and  compliance  costs  of 
implementing  some  elements  of  the  legislation.  A  final,  cross-country  analysis  has 
enabled  the  identification  of  good  practices  while  enabling  the  formulation  of 
recommendations. 

Evaluation questions  
In addition to the evaluation questions that have been answered by the present study, 
a  mapping  of  the  current  arrangements  reflecting  the  different  approaches  of  the 

16  According  to  Article  45  of  Directive  2008/118/EC,  By  1  April  2015,  the  Commission  shall  submit  to  the 
European Parliament and the Council a report on the implementation of this Directive.  While according to 
Article 19  of  Directive  2011/64/EU,  every four years,  the Commission  shall  submit  to  the  Council  a report 
and, where appropriate, a proposal concerning the rates and the structure of excise duty laid down in this 
Directive. 
17 Directive 2011/64/EU and Directive 2008/118/EC 

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national  systems  for  excise  duty  collection  has  been  conducted,  this  background 
consists of the following elements: 

Table 2 Mapping of current arrangements 

Background: What are the current arrangements for the collection of excise duty on tobacco 
products in the Member States? 

Q.1.1 What is the structure of the excise duty applied in each Member State, inclusive of the 
minimum excise duty? 

Q.1.2 What are the main features of the tobacco taxation collection systems? 

Q.1.3 What licencing and authorisation apply to operators involved in the tobacco supply 
chain? 

Q1.4 What are the processes / activities performed by Member States’ authorities to ensure 
the collection of tax revenue (e.g. in terms of monitoring, tax assessment, collection, 
authentication and verification, auditing, etc.)? 

Q1.5 What IT technologies are used by tax authorities to combat illicit trade and ensure the 
collection of tax revenue? 

Table 3 presents a brief summary of the evaluation questions that have been analysed 
in the context of this study; Appendix 1 – Evaluation Matrix and Evaluation Design of 
this  report  presents  in  detail  each  evaluation  question,  including  sub-questions, 
indicators, descriptors, as well as evaluation criteria and data sources.  

The complete methodological approach used for providing answers to these questions 
may be found in the same appendix. 

Table 3 Evaluation questions 

Question 2: To what extent do the current arrangements for tobacco excise duty on tobacco 
products safeguard Member States' budgetary objectives? 

Q2.1 To what extent do the definitions of taxable products in Articles 2-6 of Directive 
2011/64/EU allow for adequate (correct categories and rates) collection of the due excise 
duties for manufactured tobacco products? 

Q2.2 To what extent are the definitions of taxable products in Articles 2-6 of Directive 
2011/64/EU appropriate to enable monitoring, verification and authentication, and identify 
illicit trade, evasion and abuse in the Internal Market? 

Q2.3 How does the treatment of products not defined by the Directive impact the ability to 
perform monitoring of trade/ logistics of taxable tobacco products? 

Question 3: To what extent do the current arrangements for excise duty on tobacco products 
ensure the proper functioning of the Internal Market and avoid distortions in competition? 

Q3.1 To what extent do the current rules on MED (Minimum Excise Duty) allow for neutral 
conditions of competition and the proper functioning of the internal market (avoiding 
distortion of competition or trade)? 

Q3.2 To what extent have changes in trade patterns been induced by changes in the tobacco 
excise duty levels? 

Q3.3 To what extent does the current structure and rates of the excise duties for 
manufactured tobacco guarantee the proper functioning of the Internal Market?  

Q3.4 What is the impact of the derogations and exceptions granted to/by certain Member 
States/EU regions in application of the tobacco excise duties on the Internal Market? 

Q3.5 To what extent non-harmonisation of anti-forestalling measure is detrimental to the 
proper functioning of the Internal Market. 

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Question 4: To what extent are the current arrangements for excise duty on tobacco products 
implemented in a cost-effective way? 

Q4.1 Are there any administrative tasks, monitoring or control procedures that could be 
improved in order to achieve a high level of efficiency for the tax authorities (i.e. in terms of 
administrative costs)? 

Q4.2 Are there any administrative tasks, monitoring or control procedures that could be 
improved in order to achieve a high level of efficiency for economic operators (compliance 
costs)? 

Recommendations 

What are the measures to be considered at EU level in order to ensure that the tax debt is 
effectively collected? 

What are the measures to be considered at EU level in order to ensure the proper functioning 
of the Internal Market and avoid distortions in competition? 

What are the measures to be considered at EU level in order to decrease administration / 
compliance costs on tax administration and economic operators? 

Content and structure of the report 

As  a  final  report,  this  report  contains  the  full results  of  the  work  undertaken  in  the 
context of the study. This document is a revised version of the draft report presented 
in the context of the “Tobacco round table” organised by the European Commission on 
the 6’th of June 2014 in Brussels. 

The present introduction contains general considerations with respect to the purpose, 
objectives and scope of this evaluation. 

The  following  two  chapters:  “Background”  and  “Methodology”,  provide  a  brief 
presentation  of  the  current  legislative  framework  applicable  in  the  area  of  excise 
duties  on  tobacco  products  and  explanations  on  the  analytical  design  and  data 
collection  work.  In  order  to  improve  the  readability  of  the  report,  these  relevant 
sections  are  accompanied  by  detailed  appendixes18  which  present  in  more  depth  the 
same issues. These preparatory chapters are meant to serve as an introduction to the 
main concepts and terminology that is present throughout the rest of the evaluation. A 
much more thorough descriptive of the main features of the tax collection system has 
been done in the context of Question 1. 

In  light  of  the  fundamentally  descriptive  nature  of  Question  1,  in  order  to  improve 
readability,  the  findings  connected  with  all  sub-questions  within  this  chapter  have 
been  taken  out  of  the  body  of  the  report  and  annexed  as  Appendix  5  –  Question  1: 
Background Information 

The  main  body  of  the  report  is  structured  along  the  lines  of  the  set  evaluation 
questions in order to present the specific impacts of the Directive on the effectiveness 
of  the  main  objectives  pursued  (direct  budgetary  impact,  functioning  of  the  internal 
market,  ensuring  proper  monitoring  and  control)  as  well  as  on  the  efficiency  of  the 
system for administrations and economic operators.  

All evaluation questions are answered on the basis of collected data and indicators, as 
described  in  the  evaluation  matrix.  In  order  to  ensure  transparency  and  build  a 
convincing narrative, the evidence gathered and analysed is presented in the body of 
the report in support of the conclusions presented. 

18  Appendix  1  –  Evaluation  Matrix  and  Evaluation  Design;  and  Appendix  5  –  Question  1:  Background 
Information 

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A summary of the main conclusions for each evaluation question is included at the end 
of each chapter. 

The  final  chapter  is  dedicated  to  recommendations  directed  at  the  European 
Commission, as supported by the evidence gathered in the context of this study.  

In light of the need to  reduce the size of the  report, appendixes have been prepared 
with the aim of sharing relevant information collected in the context of the study with 
the Commission. 

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Background 

This  chapter  contains  a  brief  overview  of  the  general  legislative  context  in  which  the 
current arrangements on excise duties on tobacco function. This overview summarises 
and  described  the  most  important  legislative  acts  and  other  arrangements  applicable 
at the moment of the evaluation.  

This  chapter  is  necessary  in  order  to  clarify  some  of  the  concepts  and  terms  used 
throughout the evaluation. With the exception of this present chapter, the body of the 
report  and  the  answers  to  the  evaluation  question  will  assume  a  high  level  of 
background knowledge from the reader and will not contain explanations with respect 
to the concepts. 

In accordance with the principles of the  single market, the Treaty on the Functioning 
of  the  European  Union  (TFEU)  stipulates  that  “the  Council  […]  shall  adopt  provisions 
for the harmonisation of legislation concerning turnover taxes, excise duties and other 
forms of indirect taxation to the extent that such harmonisation is necessary to ensure 
the establishment and the functioning of the internal market and to avoid distortion of 
competition”19. 

The  basic  principles  applicable  to  all  products  subject  to  excise  duties  have  been  laid 
down in Directive 92/12/EEC20 subsequently replaced by Directive 2008/118/EC21. The 
latter  represents  the  reference  point  for  the  production,  handling  and  movement  of 
excisable products.  

Council Directive 2008/118/EC 
The rationale behind the adoption of a common framework for all products subject to 
excise duties is detailed in the preamble of  Council Directive 2008/118/EC.  The main 
objectives are the proper functioning of the internal market and the effective collection 
of the tax debt to safeguard the budgetary interests of Member States.  

The Directive, inter alia: 

  Lists the categories of goods for which excise duty is levied, while referencing 

the legislative acts which further define each category; 

  Defines certain terms in order to ensure harmonisation and common 

understanding in the internal market, including a taxonomy of the different 
economic operators involved in the supply chain of tobacco products; 

  Enumerates some of the derogations and exemptions applicable; 

  Sets forth certain common provisions relating to the production, processing and 

holding of excise goods; 

  Lays down the procedure applicable for the movement of excise goods under 

duty suspension and certain aspects which relate to the movement and taxation 
of goods after their release for consumption. 

19  Article  113,  Treaty  on  the  functioning  of  the  European  Union,  Official  Journal  of  the  European  Union,  C 
83/94, 30.3.2010 
20  Council  Directive  92/12/EEC  of  25  February  1992  on  the  general  arrangements  for  products  subject  to 
excise duty and on the holding, movement and monitoring of such products OJ L 76, 23.3.1992 
21  Council  Directive  2008/118/EC  of  16  December  2008  concerning  the  general  arrangements  for  excise 
duty and repealing Directive 92/12/EEC, Official Journal of the European Union L 9/12, 14.1.2009 

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Council Directive 2011/64/EU 
The arrangements on the taxation of tobacco products were first introduced in 197222. 
Significant  changes  and  amendments  were  made  in  the  course  of  the  1990s  through 
the  adoption  of  a  series  of  Directives  aimed  at  simplifying  and  updating  the  general 
framework23.  

Since then, a number of successive revisions amended the legislative framework 24. In 
2011  in  the  interest  of  clarity  and  rationality  and  with  the  aim  to  streamline  and 
simplify the provisions on the taxation of tobacco products, a single legislative act was 
adopted,  namely  Council  Directive  2011/64/EU.  This  latter  act,  together  with  Council 
Directive  2008/118/EC,  represents  the  reference  point  for  the  taxation  of  tobacco 
products at the moment. 

Directive  2011/64/EU  lays  down  general  principles  for  the  harmonisation  of  the 
structure  and  rates  of  the  excise  duty  to  which  the  Member  States  subject 
manufactured tobacco. More specifically, it contains: 

  Further explanations on the meaning of “manufactured tobacco” and specific 
definitions for cigarettes; cigars and cigarillos; and smoking tobacco (fine-cut 
tobacco for the rolling of cigarettes or other smoking tobacco); 

  Specific tax provisions applicable to cigarettes and the other categories defined, 

including: 

o  The definition and limits for an ad valorem component excise duty (calculated on 

the maximum retail selling price); 

o  The percentage of the specific component of excise duty in the amount of the 

total tax burden calculated on the basis of the weighted average price; 

o  The minimum amount of the overall excise duty; 

o  The methods for calculating the weighted average retail selling price (hereafter 

WAP); 

o  Provisions regarding the application of minimum consumption taxes on cigarettes 

(hereafter MED). 

The  provisions  of  Council  Directive  2011/64/EU  in  terms  of  tax  rates  and  structure 
distinguish  between  cigarettes,  cigars  /  cigarillos,  fine-cut  tobacco  for  the  rolling  for 
cigarettes and other smoking tobacco. Special attention is paid to the issue of fine-cut 
tobacco  for  the  rolling  of  cigarettes  in  light  of  its  high  degree  of  substitution  with 
manufactured cigarettes.  

Excise  duties  can  be  specific,  ad  valorem  or  mixed.  A  specific  excise  is  levied  as  a 
fixed monetary amount of tax per quantity, volume or weight of tobacco, while an ad 
valorem excise is levied as a percentage of some measure of product value (currently 
the weighted average price of tobacco).  

In  a  purely  specific  excise  structure,  the  same  mixed  monetary  amount  is  applied  to 
all  tobacco  products  of  a  given  quantity,  volume  or  weight,  irrespective  of  their  pre-

22 Council Directive 72/464/EEC , later amended by Directive 1979/32/EEC 
23  Council  Directive  92/79/EEC  of  19  October  1992  on  the  approximation  of  taxes  on  cigarettes;  Council 
Directive 92/80/EEC of 19 October 1992 on the approximation of taxes on manufactured tobacco other than 
cigarettes  and  Council  Directive  95/59/EC  of  27  November  1995  which  consolidated  the  previous 
arrangements on tobacco products 
24 Firstly in 2002 by Council Directive 2002/10/EC and in 2003 by Council Directive 2003/117/EC, followed 
by an in-depth revision which involved the preparation of an external study, a Commission Report, and an 
Impact Assessment which led to Directive 2010/12/EC 

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tax  price.  This  structure  tends  to  discourage  consumption  of  tobacco  products, 
irrespective  of their price, is relatively easy to administer, delivers greater budgetary 
stability and narrows the gap between low-and high-priced tobacco brands. However, 
a fixed monetary amount disproportionally affects lower-priced products and does not 
automatically keep pace with inflation and must be adjusted regularly.  

Conversely, a purely ad valorem structure tends to lead to lower prices, with a wider 
gap  between  low-  and  high-price  brands,  but  reduces  the  incentives  for  (costly) 
qualitative  improvements.  While  a  purely  ad  valorem  structure  keeps  pace  with 
inflation, it is more complex to administer as both prices and quantities must be kept 
monitored. 

Combining a specific and ad valorem25 component (where the relative weight of each 
can vary across countries) allows exploiting the best elements of each and at the 
same time to compensate for their respective weaknesses and to simultaneously 
pursue a variety of objectives.  

The provisions for cigarettes 

From  the  1’st  of  January  2014,  the  overall  excise  duty  burden  (specific  plus  ad 
valorem  excluding  VAT)  must  represent  at  least  60%  of  the  WAP  and  not  less  than 
EUR  90  per  1,000  cigarettes.  The  60%  rule  need  not  be  complied  with  if  a  country 
levies  an  excise  duty  of  at  least  EUR  115  per  1,000  cigarettes.  Bulgaria,  Estonia, 
Greece,  Latvia,  Lithuania,  Hungary,  Poland  and  Romania  are  granted  a  transitional 
period  until  31  December  2017.  The  territory  of  Corsica  has  also  been  granted  a 
transition period, whereas small-scale producers in the remote  regions of Azores and 
Madeira are given an exemption. 

The minimum excise duty (MED) and the weighted average price (WAP) 

The  two  concepts  mentioned  above  are  worth  explaining  as  they  represent  pivotal 
elements  of  the  current  system,  namely  the  minimum  excise  duty  and  the  weighted 
average retail selling price.  

A  minimum  excise  duty  (hereafter  MED)  can  be  defined  as  a  fixed  monetary  amount 
per  quantity,  volume  or  weight  that  applies if  the  excise  duty  falls  below  a  minimum 
floor. In a system with MED, lower-priced products are taxed at the specific minimum 
rate, while higher-priced (i.e. above the floor) products are taxed at the normal rate, 
which  includes  the  ad  valorem  component.  In  the  European  context,  the  MED  has 
usually been understood as a specific amount since its introduction in Article 16(5) of 
Council Directive 1995/59/EC. The primary effect of the MED is to counterbalance the 
effects of the ad valorem component in the case of cheaper products. 

Articles  7  (4)  provides  that  “where  necessary,  the  excise  duty  on  cigarettes  may 
include a minimum tax component, provided that the mixed structure of taxation and 
the  band  of  the  specific  component  of  the  excise  duty  as  laid  down  in  Article  8  is 
strictly respected” and Article 8(6) allows for the introduction of a MED.  

The  issue  of  the  weighted  average  retail  selling  price  (hereafter  WAP)  represents  a 
major  aspect  of  discontinuity  with  the  past.  Taking  stock  of  the  outcomes  of  the 
revision  that  took  place  in  2008  and  led  to  the  adoption  of  Council  Directive 
2010/12/EC,  the  current  Directive  confirms  the  use  of  the  WAP  instead  of  the  most 
popular  price  category  (MPPC)  as  a  reference  point  for  setting  minimum  tax 

25  According  to  Par.  11  Council  Directive  2011/64/EU,  the  specific  component  is  calculated  per  unit  of 
product, while the ad valorem component is based on the retail selling price, inclusive of all taxes. 

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requirements.  As  pointed  out  in  the  2008  Impact  Assessment26,  the  use  of  the  MPPC 
entailed  distortions  of  the  competition.  Not  only  was  the  MPPC  highly  volatile  due  to 
changes  in  tax  component,  price  structure  and  external  factors,  but  also  it  gave  the 
dominant tobacco manufacturer the power to strategically shift the price of the MPPC 
brand  so  as  to  increase  the  tax  burden  of  the  competitors.  Moreover,  as  the  MPPC 
could fall in a low price category in some Member States, and in a high price category 
in others, it was ill suited to ensure a uniform minimum level of taxation. The current 
provision thus adopts the WAP defined as the total price of all quantities released for 
consumption divided by the total quantity (based on data from the previous calendar 
year).  

The provisions for tobacco products other than cigarettes 

Unlike  cigarettes,  other  manufactured  tobacco  products  are  not  required  by  the 
Directive  to  be  subject  to  a  mixed  structure,  as  a  result,  manufactured  tobacco 
products  other  than  cigarettes  are  taxed  with  either  a  purely  specific,  a  purely  ad-
valorem or a mixed system, depending on the individual choices of Member States.  

At  the  moment,  the  minimum  requirements  for  the  overall  excise  duty  charged  in 
tobacco  products  other  than  cigarettes  differ  across  product  groups.  In  the  case  of 
cigars  and  cigarillos,  the  overall  excise  duty  cannot  be  lower  than  5%  of  the  retail 
selling  price  (including  all  taxes)  or  EUR  12  per  1,000  pieces  or  per  kilogram.  As 
pointed out in previous paragraphs, particular attention is paid to fine-cut tobacco for 
the  rolling  of  cigarettes.  The  initial  level  of  taxation  (40%  of  WAP  or  EUR  40  per 
kilogram) is set to increase progressively starting from 1 January 2013 until 1 January 
2020 when it will reach 50% of WAP (or EUR 60 per kilogram). This pattern suggests 
that it is an explicit objective of the European Commission and the Council to bring the 
minimum  levels  of  taxation  on  fine-cut  tobacco  closer  to  that  of  manufactured 
cigarettes to better account for their high degree of substitution27.  

In the case of “other smoking tobacco” the excise duty may not be lower than 20% of 
the  retail  selling  price  (including  all  taxes)  or  EUR  22  per  kilogram.  Table  4 
summarizes the requirements. 

Table 4 Excise duty structure and limits for tobacco products other than cigarettes 

Overall duties28 excluding VAT 

Cigars and cigarillos 

5% of retail selling price (inclusive of all taxes) or €12 per 
1000 items or per kilogram 

Fine-cut smoking 
tobacco for the rolling 
of cigarettes 

40% of WAP or €40 per kilogram. Increases are foreseen to 
bring the overall excise duty to  50% of WAP or €60 per 
kilogram by 2020 

Other smoking 
tobaccos 

20% of retail selling price (inclusive of all taxes) or €22 per 
kilogram 

Exemptions and derogations 
Council Directive 2011/64/EU and Council Directive 2008/118/EC foresee derogations 
and exemptions in the application of the provisions. For instance, Article 4 of Directive 
2011/64/EU  allows  for  Germany  and  Hungary  to  postpone  the  application  of  the 

26  Commission  staff  Working  Document,  Accompanying  document  to  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. (SEC(2008) 2266) 
27 Ibid 26 
28 Expressed as a percentage, as an amount per Kg or for a given number of items 

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definition  of  cigars  and  cigarillos  until  1  January  2015.  Articles  12(2)  and  14(4)  give 
France  the  possibility  to  temporarily  apply  lower  excise  duty  rates  to  cigarettes  and 
other  tobacco  products  in  Corsica29.  By  means  of  Article  10(2)  Bulgaria,  Estonia, 
Greece,  Latvia,  Hungary,  Poland  and  Romania  are  granted  an  extension  until  31 
December  2017  for  bringing  their  overall  excise  duty  on  cigarettes  within  the 
mandated  range.  Finally,  Portugal  can  apply  a  reduced  duty  rate  to  cigarettes 
consumed in the remote communities of the Azores and Madeira made by small-scale 
local producers.  

The provisions laid down in Directive 2008/118/EC apply to the whole territory of the 
Community made exception for the Canary Islands, the French overseas departments, 
the  Åland  Islands  and  the  Channel  Islands.  Furthermore,  the  territories  not  forming 
part of the customs territory are also  excluded, these being the  Island of  Heligoland, 
the territory of Büsingen, Ceuta and Melilla, Livigno, Campione d’Italia and the Italian 
waters of Lake Lugano. These are summarised in Table 5: 

Table 5 Exemptions and derogations 

Exemptions 
(permanent nature) 

Derogations 
(temporary nature) 

Directive 
2008/118/EC 

Canary Islands, the French overseas 
departments, the Åland Islands and 
the Channel Islands, Island of 
Heligoland, the territory of Büsingen, 
Ceuta and Melilla, Livigno, Campione 
d’Italia and the Italian waters of 
Lake Lugano 

Directive 
2011/64/EU 

Azores and Madeira (PT) 

Germany and Hungary (definition of 
cigars and cigarillos) 

Bulgaria, Estonia, Greece, Latvia, 
Hungary, Poland and Romania 
(57%-rule on cigarettes) 

Other aspects of the taxation of tobacco products 
In  addition  to  the  above  mentioned  Directives,  other  arrangements  have  been  made 
to enhance the ability of Member States to pursue their fiscal objectives. These include 
the  Excise  Movement  and  Control  System  (hereafter  EMCS),  the  provisions  on 
administrative cooperation, track and trace systems and anti-forestalling measures. 

Excise Movement and Control System  

The EMCS is a computerised system for monitoring movements of excise goods under 
a  duty-suspension  arrangement  within  the  EU.  The  legal  foundations  of  EMCS  are  to 
be  found  in  Decision  1152/2003/EC  of  the  European  Parliament  and  of  the  Council, 
dated  16  June  2003,  and 
implementing  Directive 
2008/118/EC. The computerization of the system was preceded by a Feasibility Study 
conducted  in  1999  and  2000  following  the  recommendations  of  a  High  Level  Group 
endorsed by ECOFIN in 1998. 

in  Regulation  2009/684 

EMCS has been introduced following a "1+3"-phases roadmap that run between 2002 
and 2012. It has become operational on 1’st April 2010 with the conclusion of Phase 2. 
(AAD)  had  been 
The  paper-based  Accompanying  Administrative  Document 

29 As made clear in Par. 22 of the Preamble of Council Directive 2011/64/EU derogations will be valid until 
31 December 2015. 

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progressively replaced by an electronic Administrative Document (e-AD) with a phase-
in period that lasted until 31 December 2010 after which the AAD lost its legal basis. 
The e-AD helped to simplify the procedures, making the movement of the goods under 
duty-suspension  more  secure  and  the  release  of  the  guarantee  for  trader  quicker. 
Moreover,  the  availability  of  real-time  data  enhanced  the  ability  of  Member  States  to 
keep  the  logistics  of  the  goods  under  control.  The  system  was  upgraded  and  its 
functions  expanded  in  2012  with  the  possibility  for  Member  States  to  exchange 
information and enquiries on the movement of excisable goods.  

Administrative cooperation and the exchange of information 

The  current  provisions  on  cooperation  between  national  tax  administrations  and  the 
European  Commission  have  been  laid  down  in  Council  Regulation  389/2012  which 
provides for “procedures to enable the competent authorities of the Member States to 
cooperate  and  to  exchange,  by  electronic  means  or  otherwise,  information  that  is 
necessary  to  ensure  the  correct  application  of  legislation  on  excise  duties”  (Article 
1(1)).  Taking  stock  of  the  past  experience  and  the  most  recent  developments 
(including  EMCS),  the  current  provisions  acknowledge  the  benefits  and  promote  the 
systematic  use  of  electronic  means  in  view  of  enhancing  the  effectiveness  and  the 
efficiency of the system of excise duty collection. 

Among other things, Council Regulation 389/2012: 

  Lays down clearer rules and procedures enabling the competent national 

authorities to cooperate and to exchange other any information that may help to 
apply the provisions in an effective manner;  

  Differentiates between mandatory (with or without prior request) and optional 

ex-change of information; 

  Creates a single point of contact in each Member State (‘central liaison office’) 

with the possibility of the latter to delegate the task to other authorities/officials 
for questions of efficiency (‘liaison departments’); 

  Mandates that each Member state should maintain an electronic database with 
information on registered economic operators and premises authorized as tax 
warehouses so as to facilitate a rapid exchange of data (e.g. identification 
number, address, category and nomenclature of the products held/received in 
each premise); 

  Establishes EMCS as the normal means through which information concerning 

administrative cooperation is exchanged. 

Track and trace systems 

The main rationale for the adoption of tracking and tracing systems is the facilitation 
of  the  investigations  into  tobacco  smuggling  and  illicit  trade,  i.e.  the  identification  of 
the point of diversion of the tobacco products30. A global scale system would allow for a 
detailed  analysis  of  the  logistics  of  tobacco  product  and  the  analysis  of  smuggling 
trends,  thus  it  would  make  it  easier  to  carry  out  inspections  in  an  efficient  and 
effective way. 

Tracking  means  “systematic  monitoring  by  competent  authorities  […]  of  the  route  or 
movement  taken  by  tobacco  products  through  their  respective  supply  chains  of 
manufacture,  sale,  distribution,  storage,  shipment,  import  or  export,  or  any  part 
thereof”  (Joossens  2011:2).  Tracing  instead  amounts  to  recreating  the  route  or 

30 European Commission, 2011, Pricing Policies and Control of Tobacco in Europe (PPACTE), Deliverable 5.2: 
Illicit tobacco trade in Europe: issues and solutions, Luk Joossens. 

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Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

movement taken by tobacco products, thus it should be conceived as a retrospective 
system31.  

Given  the  global  nature  of  the  problem  of  illicit  tobacco  trade,  a  first  coordinated 
international response was achieved in 2005 with the signing of the WHO Framework 
Convention on Tobacco Control (hereafter FCTC)32. In this context, the so called Illicit 
Trade Protocol (ITP)33 has been negotiated as a supplementary treaty to the FCTC and 
it is currently being ratified by the Parties. In Article 8 of the ITC, the arrangements on 
the  adoption  of  a  global  scale  tracking  and  tracing  regime  are  laid  down.  Within  five 
years34 of entry into force of the Protocol, each Party shall require that unique, secure 
and non-removable identification markings are affixed or form part of all units packed 
such  that  a  minimum  amount  of  information  on  the  logistics  of  the  product  is  made 
available  (e.g.  data  and  location  of  manufacture,  machine  used,  warehousing  and 
shipping, intended market of retail sale, etc.). 

31 Ibid 30 
32 WHO Framework Convention on Tobacco Control, adopted by the World Health Assembly on 21 May 2003 
and entered into force on 27 February 2005. 
33  WHO  Protocol  to  Eliminate  Illicit  Trade  in  Tobacco  Products,  adopted on  12  November  2012  at  the  fifth 
session of the Conference of the Parties in Seoul, Republic of Korea.   
34 An extended roadmap (ten years) is envisioned for tobacco products other than cigarettes 

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Methodology 
This chapter briefly describes the methodological approach used for this evaluation. It 
offers  a  simplified  overview  of  the  data  collection  steps  which  were  implemented  by 
the project team. A more detailed insight into the conceptual design and the analytical 
strategy can be found in Appendix 1 – Evaluation Matrix and Evaluation Design 

As Figure 1 indicates, the evaluation has been organised into 3 major phases, Design, 
Data collection and Analysis.  

Figure 1 Overall organisation of the work 

During the design phase of the study, Ramboll has participated in the Fiscalis seminar 
on  tobacco  excise  duties  in  in  Vilnius  (LT)  between  29th  and  31st  October  2013  in 
order to help better design and focus the evaluation questions towards “problematic” 
areas,  and  also  to  ensure  sufficient  understanding.  The  presence  in  the  seminar  also 
helped  clarify  the  scope  and  role  of  the  present  study  towards  the  authorities  of 
Member  States  while  also  building  the  necessary  relationships  to  help  prepare  a 
participatory approach. 

Below, each phase of the evaluation will be described in broad outline.  

Phase 2.1 – Data collection I - Stakeholder consultation 

Survey to Member States 

In the first phase of data collection, a broad consultation of national tax authorities by 
means  of  a  survey  questionnaire  was  undertaken.  The  questionnaire  covered  almost 
all aspects of the evaluation and established a comprehensive baseline of the current 
EU  excise  duty  system  as  implemented  nationally.  A  copy  of  the  questionnaire  is 
attached in Appendix 2 – Questionnaire to Member States. 

Following  a  short  piloting  phase  with  a  small  number  of  Member  States,  the 
questionnaire was sent to all tax administrations by e-mail on 8’th November 2013. 

26 

Phase 2Data collectionPhase3AnalysisPhase 1DesignDesk ResearchInterviews Commission, Stakeholders consultationAnalysis and assessmentJudgement and ReportingRevised understanding of the taskIntervention LogicEvaluation MatrixIndicators, descriptors, data sourcesRevised MethodologyInception ReportData collection IDesk researchConsultation with Member States authoritiesSurvey to economic operatorsGathering of quantitative dataDraft descriptive chapter of context (baseline)Selection of Case Study countriesInterim ReportData collection IIOn-site visitsCase studiesDraft conclusions and recommandationsDraft Final ReportRevision of draft final reportExecutive summaryFinal ReportOn –site visits Case studiesAnalysis of quantitative dataCoding and analyis of qualitative data from MS and economic operatorsAnswers to each evaluation question 
 
 
 
 
 
 
 
 
 
 
 
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

The  wide  majority  of  Member  States  have  chosen  to  deliver  responses  in  writing.  All 
submissions have been followed-up by phone, ensuring, consistency, avoiding possible 
misunderstandings. Wherever possible, (as a result of proximity and interest shown by 
a number of Member States35) face-to-face interviews have been conducted.  

The  participation  rate  is  considered  to  be  excellent,  as  27  out  of  28  Member  States 
have provided very detailed answers to the questionnaire. 

Survey to Economic operators 

A  consultation  of  economic  operators  by  the  means  of  an  online-survey  has  been 
undertaken.  Its  main  aim  was  to  collect  perceptions  on  and  experience  with  the 
functioning  of  the  current  excise  duty  structure  and  identify  the  most  burdensome 
activities36 in relation to excise duties.  

The  analysis  of  the  survey  answers  have  taken  into  account  any  potential  bias  or 
concerted  answers  in  order  to  give  a  fair  indication  of  the  position  of  different 
economic operators involved. 

The scope  of the questions addressed to  economic operators  was somewhat different 
than  those  addressed  to  Member  States,  with  most  questions  focusing  around  the 
impact  that  the  current  measures  have  on  the  activities  of  operators  while  others 
focused on the compliance steps performed.  

The  survey  was  officially  launched  on  the  9th  of  December  2013;  The  main  industry 
associations  of  stakeholders  (CECCM;  ESTA;  ECMA;  BDTA;  COPA-COGECA)  were 
invited to distribute the survey further to all interested economic operators. 

The  initial  deadline  for  providing  answers  to  the  questionnaire  was  set  at  23’rd  of 
December  2013;  however,  due  to  extraordinary  circumstances  related  to  increased 
workload  of  economic  operators  in  the  weeks  preceding  the  end  of  the  year.  The 
deadline was extended until 15’th of January 2014. 

Details on how the survey was administered, together with a Microsoft Word version of 
the  questionnaire  may  be  found  in  Appendix  3  –  Survey  Questionnaire  to  Economic 
Operators and in Appendix 4 – Analysis of survey data from economic operators. 

A total survey population of 48 responses were taken into account in the final analysis 
of  survey  data.  –  However  the  survey  population  for  a  number  of  graphs  may  differ 
from  this  number  due  to  the  design  of  a  number  of  questions,  which  allowed 
respondents  to  provide  an  answer  for  each  individual  Member  State  in  which  they 
operate. 

Details  on  the  survey  population  as  well  as  a  detailed  analysis  of  the  answered 
received  can  be  found  in  Appendix  4  –  Analysis  of  survey  data  from  economic 
operators. 

Desk research and literature review 

A  broad  literature  review  and  desk  research  has  also  been  conducted;  this  task  has 
been  supported by the  study of legislation, administrative notes, academic literature, 
and statistical data. Where appropriate, it has been complemented by expert input. 

35 Belgium, Denmark and Romania 
36 i.e. the most time-consuming and resource-demanding activities 

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Phase 2.2: Data collection 2 (field study) 
Upon completing the first round of data collection, a number of good practices as well 
as problematic areas were identified through the responses of stakeholders. The field 
study was therefore designed to further investigate the practical implications of these 
issues,  documenting  the  administrative  and  compliance  costs  for  tax  administrations 
and economic operators.  

Objectives 

The objective was to identify good practices and areas that offer the highest potential 
for  improvement  in  terms  of  effectiveness  and  efficiency  for  the  national  tax 
administrations. 

The  (compliance)  costs  for  businesses  were  also  analysed  as  part  of  the  field  study. 
The purpose was get a deeper understanding of the activities they perform in relation 
to  excise  duties  and  assess  the  extent  to  which  the  identified  issues  result  in  added 
compliance cost and/or legal uncertainty.  

The  country  case  studies  therefore  analysed  in  more  detail  the  administrative  tasks, 
monitoring  or  control  procedures  and  tools.  The  time  and  resources  spent  on  the 
collection of excise duties were mapped and identified, to the extent possible.  

Conducting case studies in selected Member States 

The  core  of  the  field  measurement  was  constituted  by  a  series  of  case  studies  of 
selected Member States,  

The case studies entailed a series of face-to-face interviews with representatives from 
tax  administrations  and  economic  operators  from  the  tobacco  supply  chain.  On 
average  2-3  group  interviews  have  been  conducted  in  each  Member  State.  For  each 
interview,  persons  with  operational  knowledge  in  the  different  areas,  connected  with 
the  implementation  of  the  evaluated  provisions  were  present.  As  a  result,  the  entire 
process  of  compliance  and  implementation  was  mapped  while  the  key  steps  (and/or 
actions)  were  further  investigated  and  measured  in  terms  of  administrative  and 
compliance costs.  

In addition, some desk research was also necessary to extract and supplement some 
information  from  legislative  acts  or  administrative  notices  with  respect  to  obligations 
and  processes  that  economic  operators  have  to  comply  with  in  dealing  with  excise 
duty goods. 

The  cost  of  current  practices  and  systems  for  the  tax  administration  were  assessed 
using an Activity Based Costing (ABC) inspired approach in order to estimate the time 
and  resources  spent.  This  has  allowed  the  study  team  to  get  an  in-depth 
understanding of the tasks performed in order  to collect excise duty  on tobacco, and 
understand how good practices or weaknesses matter in terms of costs.  

The process 

When  conducting  the  case  studies  the  team  members  used  similar  tools,  (i.e. 
interview  guides  and  reporting  templates)  to  conduct  the  interviews  in  a  uniform 
manner that ensured consistency in approach.  

The  results  of  each  case  study  were  reported  in  a  similar  and  consistent  framework, 
organised on the basis of evaluation questions, facilitating cross-country analysis and 
reporting. 

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Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

Selection of countries and motivation for selection  

The  selection  of  countries  for  case  studies  was  an  important  element  of  the  study 
design.  It  reflected  the  diversity  of  national  contexts  (i.e.  large/small  countries), 
different national approaches for enabling  the collection of excise duties (e.g. with or 
without tax stamps) as well as different contextual factors (e.g. reported experiences 
with “problematic issues”).  

The selection is considered to have been diverse enough to enable extrapolations and 
to ensure a solid empirical foundation.  

The  following  Member  States  were  included  in  the  second  round  of  data  Collection: 
Finland, Greece, Denmark, United Kingdom, Romania, Poland37 and Germany38. 

Phase 2.3: Data collection 3 (Euromonitor data) 
Euromonitor provides country-level tobacco data for each of the EU Member States via 
its online ‘Passport’ data service.39  The data available include: 

  unit price and retail sales values/volumes by product category (cigarettes, cigars 

etc.) and sub-category (large cigars, cigarillos etc.); 

  average cigarette price by price band; 

  penetration of illicit trade in cigarettes; 

  volume of trade in cigarettes; 

  smoking prevalence. 

These data were used in our analysis of the economic impacts of the  2011 Directive, 
together with data gathered through other desk-based research (e.g. price elasticities) 
and the information obtained through stakeholder engagement. Monetary data were at 
constant  2012  prices  (i.e.  in  ‘real  terms’)  and,  where  relevant,  were  conve,rted  by 
Euromonitor, to euro at fixed 2012 exchange rates.  As noted later in this report, we 
consider that consumers respond to change in retail prices, whether driven by changes 
in  excise  duties  or  other  factors.    Therefore,  we  do  not  adjust  retail  price  data  to 
account for changes  in excise duties.   We have also used the DG  TAXUD excise duty 
tables to form estimates of tax revenues.  

There  are  no  reliable,  consistent  and  comprehensive  data  on  the  prices  and  sales 
volumes of tobacco products across the EU in the public domain.  

The  value  of  Euromonitor  data  is  that  a  consistent  methodology  is  used  to  estimate 
the statistics in each Member State. In our assessment, they also avoid the drawbacks 
of  the  DG  TAXUD  releases  for  consumption  data40.  Also,  the  Euromonitor  data  are 
broken down between cigarettes, cigars, cigarillos, fine-cut and pipe tobacco whereas 
in DG TAXUD’s releases for consumption data fine-cut is grouped with other smoking 
tobacco in several countries 

37 As a result of resource constraints within the administration, the authorities of Poland did not take part in 
interviews pertaining to the second round of data collection. The level of detail of the answers given in the 
first  round  of  consultation  and  additional  desk  research,  however,  allowed  the  study  team  to  finalise  the 
case study at a satisfactory level. 
38 As a result of the explicit request of the German authorities, input to the second round of data collection 
has been collected in writing, as a result, no country visits were performed in Germany and the interviews 
with economic operators were undertaken by phone.  
39 A detailed description of Euromonitor’s methodology is available on its website.  
40 In particular, in a note to the tables DG TAXUD states that “for a number of Member States, as a result of 
forestalling  (release  for  consumption  of  large  volumes  immediately  prior  to  a  tax  increase)  releases  for 
consumption are artificially high in certain years as compared to the normal pattern”.   

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Euromonitor’s business model depends on its provision of non-biased data that are as 
accurate as possible.  The data have been used in previous reports for the European 
Commission  and  its  Executive  Agencies41.  For  these  reasons,  we  consider  that  the 
Euromonitor  data  are  more  reliable  than  data  that  are  in  the  public  domain  and  the 
consistent  cross-country  methodology  means  that  the  data  are  well-suited  to  the 
analysis undertaken in this study. 

Phase 3: Analysis and recommendations 
The analytical strategy for this evaluation followed the lines defined in the tender and 
described in Appendix 1 – Evaluation Matrix and Evaluation Design. 

Through  careful  triangulation  of  data  and  cross-country  analysis  and  comparison,  it 
was  possible  to  establish  a  baseline  in  terms  of  the  problems  faced  by  tax 
administrations  and  economic  operators  and  their  drivers  and  subsequently  answer 
each evaluation question and sub-question.  

Additional  mentions  regarding  the  analytical  approach  to  managing  quantitative  data 
were further detailed in our request for additional data. For the sake of brevity, these 
are not re-published in the body of this report.  

41 See, for example, Executive Agency for Health and Consumers, 2013, Economic analysis of the EU market 
of tobacco, nicotine and related products, Revised Final Report, Matrix Insight 

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Question 2: To what extent  do  the  current  arrangements  for 
tobacco  excise  duty  on  tobacco  products  safeguard  Member 
States' budgetary objectives? 
This question aims to identify potential weaknesses in the current system for collecting 
excise  duty  on  tobacco  products.  We  begin  by  looking  at  the  total  revenue  collected 
through  tobacco  excise  duties  and  also  the  value  of  revenue  avoided,  for  example 
because  of  illicit  trade.  The  latter  may,  in  broad  terms,  be  referred  to  as  the  excise 
duty  gap  (more  strictly  the  gap  is  the  difference  between  what  should  have  been 
collected  and  what is  effectively  collected,  expressed  as  a  percentage  of  the  revenue 
due). We estimate the excise duty gap to provide an understanding of its scale  

We  then  look  at  the  contribution  of  various  elements  of  Directive  2011/64/EU  to 
safeguarding  Member  States’  budgetary  objectives.  Specifically,  we  analyse  the 
current tobacco excise system, structure and scope to provide a holistic understanding 
of the issue. 

Total Excise Duty Collected – Cigarettes 
DG  TAXUD  has  published  data  on  the  revenues  from  taxes  on  consumption  of 
manufactured  tobacco  between  2008  and  2012.  However,  these  data  are  not  always 
disaggregated  by  tobacco  product.  For  example,  in  Austria,  Poland  and  Greece,  tax 
revenues  for  cigars,  cigarillos  and  other  smoking  tobaccos  were  aggregated  with 
cigarettes tax revenues so that only a single figure is reported. As such, it is difficult to 
obtain a clear picture of the tax revenues accrued from each type of  tobacco directly 
from these data.  

We therefore calculated the total tax revenue from cigarettes based on our knowledge 
of cigarettes’  excise tax rate (from DG TAXUD’s excise duty tables42) and data on the 
volume of cigarettes sold43 in order to estimate the total tax collected. This calculation 
is illustrated below: 

42 The total tax burden per 1000 cigarettes on excise duty tables includes VAT. A series of calculations were 
done to obtain the ex VAT value. The calculation also differs between years as some years use TIRSP as a 
reference point, others use WAP.  
43  These  data  were  accessed  from  Euromonitor.  We  note  that  there  are  no  data  on  Cyprus,  Malta  and 
Luxemburg and that 2013 data are forecasted values.  Our decision to use Euromonitor sales data for this 
calculation  rests  on  the  fact  that  they  avoid  a  significant  drawback  of  the  DG  TAXUD  releases  for 
consumption  data.    In  particular,  in  a  note  to  the  tables  DG  TAXUD  states  that  “for  a  number  of  Member 
States,  as  a  result  of  forestalling  (release  for  consumption  of  large  volumes  immediately  prior  to  a  tax 
increase) releases for consumption are artificially high in certain years as compared to the normal pattern”.  
Also, the Euromonitor data are broken down between cigarettes, cigars, cigarillos, fine-cut and pipe tobacco 
whereas  in  DG  TAXUD’s  releases  for  consumption  data  fine-cut  is  grouped  with  other  smoking  tobacco  in 
several countries and there are no data on releases for consumption of cigars, cigarillos or pipe tobacco. 

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Figure 2 Calculation of excise duty on cigarettes 

In  July  2011,  DG  TAXUD  changed  its  reporting  practice.  Previously,  all  excise  duty 
numbers  were  shown  as  a  percentage  of  Tax  Inclusive  Retail  Sales  Price  (TIRSP). 
Under  the  new  rules,  the  excise  duty  data  are  shown  as  a  percentage  of  Weighted 
Average  Price  (WAP).  Given  this,  we  have  adopted  different  calculation  methods 
before and after this switch, as shown in Table 5. A comparison of excise duty net of 
VAT before and after the change also reassures that the change in methodology itself 
did not have significant impact on the final results obtained.  

The table below shows the detailed transformation performed to obtain the estimate of 
total excise duty net of VAT on cigarettes from 2008-2013. 

Table 6 Detailed calculation performed for different years 

Year 

Data available 

Calculation 

2008-2011 
March 

Specific excise duty in euros and 
as a percentage of TIRSP 

2008-2011 
March 

VAT and total tax burden 
(including VAT) as a percentage of 
TIRSP 

TIRSP in euros per 1000 sticks = Specific excise 
duty in euros / Specific excise duty as a 
percentage of TIRSP 

Total excise duty excluding VAT as a percentage 
of TIRSP = (Total excise duty including VAT as a 
percentage of TIRSP) - (VAT as a percentage of 
TIRSP) 

Total excise duty excluding VAT in euros/mn 
sticks = (TIRSP in euros)  x (Total excise duty 
excluding  VAT as a percentage of TIRSP) 

2008-2011 
March 

2011 July - 
2013 

2011 July - 
2013 

WAP, total excise duty including 
VAT as a percentage of WAP and 
specific excise duty in euros 

Ad valorem excise + VAT in euros = WAP x  

Total excise duty including VAT as a percentage 
of WAP – specific excise duty in euros 

VAT as a percentage of TIRSP, Ad 
valorem excise + VAT  as a 
percentage of TIRSP 

VAT as a percentage of Ad valorem excise + VAT 
= (VAT as a percentage of TIRSP) / (Ad valorem 
excise + VAT  as a percentage of TIRSP) 

2011 July - 
2013 

Total excise duty (including VAT) in 
euros = WAP x  

Total excise duty including VAT as 
a percentage of WAP 

Total excise duty excluding VAT in euros/mn 
sticks = Total excise duty in euros – (VAT as a 
percentage of Ad valorem excise + VAT) x (Ad 
valorem excise + VAT in euros) 

Based on this analysis, the aggregate excise duty collected from cigarette sales in the 
EU  has  fluctuated  between  €72  billion  (in  2008)  and  about  €74  billion  per  annum 
between 2008 and 2013. These nominal estimates can be compared directly with the 
DG TAXUD data on cigarettes (at least from 2008 up to 2012)  – these vary between 
€70.5 and €75 billion (but also include revenues from other tobacco products for some 
Member States, in some years).   

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If  we  compare  the  overall  tax  take  (excluding  VAT)  calculated  in  our  analysis  this 
aligns  reasonably  well  with  the  DG  TAXUD  tables.  For  example,  in  2012  the 
disaggregated  analysis  which  we  have  prepared  totals  €81.4  billion  in  taxes  (excl. 
VAT)  across  cigarettes  and  other  tobacco  products.  The  total  from  the  DG  TAXUD 
tables  for  this  year  is  €81.2  billion.  Previous  years  are  slightly  less  well  aligned  – 
however the trend year to year is broadly similar (i.e. they increase or decrease at the 
same  time).  The  change  from  TIRSP  to  WAP  does  not  appear  to  be  a  particularly 
important factor. The comparison across all tobacco products is illustrated below. 

Figure 3:  Excise duty revenues from all tobacco products (€bn)  

Note:  The monetary values in this chart are in nominal terms, as reported in DG TAXUD’s tables 

The  graph  below  shows  that  the  Member  States  with  the  highest  tax  revenue  from 
cigarettes  are  Germany,  Italy,  the  UK  and  France.  Indeed,  the  tax  from  the  largest 
four countries represents around 60 per cent of the total tax revenue. 

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Figure 4:  Excise duty revenue from cigarettes by Member State, 2012 

Source:  Europe Economics’ analysis based on approach described in Table 6 

It is clear that the countries with the greatest revenues from excise duty on cigarettes 
are those Member States with higher populations.  To provide a clearer picture of the 
differences  in  excise  duty  on  cigarettes  between  Member  States  we  present  below 
estimates  of  excise  duty  per  capita.  This  chart  shows  that  per  capita  excise  duty 
revenues  are  relatively  high  in  Greece  and  Ireland,  although  there  has  been  a 
decrease  over  time  in  these  countries  (quite  possible  due  to  the  poor  economic 
performance of these countries in recent years). 

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Figure 5:  Excise duty revenue from cigarettes per capita, by Member State 

Source:  Europe Economics’ analysis based on approach described in Table 6 

A  comparison  of  the  two  figures  below  shows  that  the  volatility  of  the  total  value  of 
excise  duty  revenue  from  cigarettes  is  similar  to  that  of  all  tax  revenue  from 
cigarettes,  although  the  volatility  of  excise  duties  in  Italy  exceeds  that  of  all  tax 
revenue.  This  suggests  that  the  root  cause  of  changes  in  excise  duty  revenues  is 
either  changes  in  excise  duty  rates  or  cigarette  sales:  changes  in  VAT  rates  do  not 
appear to have played a significant role in most Member States.  

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Figure 6  Total Excise Duty (excluding VAT) collected - Cigarettes 2008-2013 

Source:  Europe Economics’ analysis based on approach described in Table 6 

Figure 7 Total Tax revenue (including VAT) collected - Cigarettes 2008-2013 

Source:  Europe Economics’ analysis based on approach described in Table 6 

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Total Excise Duty Collected – Cigars and Cigarillos 
There  were  insufficient  data  to  estimate  the  excise  duty  revenue  on  cigars  and 
cigarillos separately.44 In addition, more than half of the data on cigarillos provided by 
the  DG  TAXUD  was  aggregated  within  the  tax  revenues  for  cigars 45.  As  a  result,  we 
analyse these two together.  

Similarly to cigarettes, the larger Member States collect more excise duty from cigars 
and cigarillos than do smaller countries.  It should be noted, however, that on average 
the  sums  involved  are  less  than  two  per  cent  of  the  revenue  from  cigarettes.  In 
France,  the  total  revenue  collected  from  cigars  and  cigarillos  is  more  than  €140 
million.  This  is  followed  by  the  UK,  around  €100  million.  It  is  worth  noting  that 
Germany’s  tax  receipts  increased  by  approximately  50  per  cent  from  2010  to  2011, 
but its collections remain below those in France and the UK. This was primarily driven 
by  an  increase  in  the  consumption  of  cigarillos  during  that  period.    Most  Member 
States’ tax revenue from cigars and cigarillos is less than €20 million. 

Figure 8 Tax receipts for Cigars and Cigarillos (2008-2012)  

Source:  Europe Economics’ analysis of DG TAXUD’s tax receipts data  
Note:  2012 is the most recent year of tax revenue data available in DG TAXUD’s tables.  Data are not available for AT, EL, MT and PL. 

Total Excise Duty Collected – Other Smoking Tobacco 
As  with  cigars  and  cigarillos,  data  on  other  smoking  tobacco  are  also  aggregated 
within other categories. This includes some of the larger Member States (e.g. France). 
The  diagram  below  identifies  only  those  countries  where  discrete  data  are  available.  
Of  those  countries,  Germany  has  the  highest  tax  receipts  in  this  category.  The 
Netherlands  also  has  a  high  value  of  tax  receipts  from  this  category  of  tobacco, 
significantly above levels seen in more populous countries (e.g. Italy).  

We also note that the tax receipts exhibit a marked upward trend in 2008-2012. The 
increase is most dramatic in Germany,  Italy, Spain and the UK.  In Spain and the UK 

44 They were provided as a percentage of TIRSP in the excise duty tables, and the TIRSP value itself cannot 
be derived from the data available. 
45 Some Member States aggregate the data together with cigarettes (e.g. in Austria and Poland). Others do 
so only for certain years (e.g. France only aggregates the data with cigarettes in 2008 and 2009). 

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this  partially  reflects  increases  in  the  duty  rates  applicable  to  other  smoking  tobacco 
while the VAT rate rose in Italy and the UK. The excise and VAT rates were unchanged 
in Germany and hence the trend in that country appears to be entirely driven by sales.  

Figure 9 Tax Receipts: Other smoking tobaccos 2008-2012 

Source:  Europe Economics’ analysis of DG TAXUD’s tax receipts data  
Note:  2012 is the most recent year of tax revenue data available in DG TAXUD’s tables.  Data are not available for AT, EL, FR and PL. 

Composition of tobacco excise duty receipts 
As  identified  above,  the  sources  (by  tobacco  product)  of  excise  duty  receipts  vary 
significantly by Member State, although cigarette tax receipts make up more than 75 
per cent of all tobacco tax receipts in every Member State where the split is available.  
The differences between Member States are illustrated in the chart below. 

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Figure 10 Composition of Tobacco Excise Duty receipts 

Source:  Europe Economics’ analysis of DG TAXUD’s excise duty tables  

Illicit Trade 
In this study, we estimate the magnitude of excise duty losses which arise from illicit 
trade only. While losses are likely to arise from other sources (e.g. from the abuse of 
tobacco  product  classifications),  it  is  not  possible  to  quantify  these  losses  given  the 
data  available  to  us  (e.g.  there  are  no  data  available  on  the  number  of  misclassified 
products).  Therefore, the estimate presented in this section should be seen as a lower 
bound to the total value of tobacco excise duty losses.   

Even with this narrower definition the assessment of the scale of illicit trade is far from 
straight-forward. This is unsurprising given its illegal nature. Joosens (2011) provides 
a good analysis of the different approaches used in its estimation and their pitfalls.46 

Given  this  caveat,  one  can  calculate  the  value  of  excise  duty  losses  in  the  case  of 
cigarettes using the following formula: 

Excise duty losses = Total excise duty in euros per thousand sticks * Illicit Volume  

This  calculation  is  based  on  the  total  excise  duty  (in  euros)  per  thousand  sticks  to 
permit  rate  data  from  DG  TAXUD’s  excise  duty  tables  to  be  used.  Euromonitor 
provides data on illicit penetration within cigarette consumption by Member State from 
2008  to  2013.47  These  data  have  the  advantages  of  a  broadly  comparable  approach, 

46 European Commission, 2011, Pricing Policies and Control of Tobacco in Europe (PPACTE), Deliverable 5.2: 
Illicit tobacco trade in Europe: issues and solutions, Luk Joossens 
47  The  dataset  contains  retail  volume  and  illicit  trade  volume  in  million  sticks.  The  data  for  2013  is 
forecasted.  Euromonitor  states  that  “by  its  very  nature  illicit  trade  is  a  market  that  is difficult  to quantify. 
Euromonitor  sources  for  this  include  trade  press,  customs  offices,  interviews  with  manufacturers  and 
retailers  as  well  as  local  knowledge  of  the  market  –  for  example  how  porous  borders  are,  how  high  unit 
prices  are,  whether  a  market  is  a  conduit  for  cigarettes  versus  actual  consumption  (e.g.  Russia  is  a 
significant exporter of illicit trade, but due to low unit prices of duty-paid cigarettes in the country, its actual 
consumption  of  illicit  trade  is  low).  Very  often  illicit  trade  will  be  expressed  as  a  proportion  of  duty  paid, 
legal sales (e.g. “illicit trade is 20% of duty paid”) and is a ballpark figure that is quoted by the industry and 
one that Euromonitor corroborates via interviews with key industry players. Due to the market’s contentious 

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Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

coverage  of  nearly  the  whole  EU28  (Croatia,  Luxembourg,  Malta  and  Cyprus  are 
omitted) and annual data over several years such that dynamics can be considered. 

Our  analysis  indicates  that  the  total  excise  duty  loss  due  to  illicit  consumption  of 
cigarettes  was  €9.5  billion  in  2012,  i.e.  about  13  per  cent  of  excise  duties  collected, 
and  €10.4  billion  in  2013.    (By  way  of  contrast,  KPMG’s  Project  Star  estimated  the 
share of the illicit consumption of cigarettes at about 11.1 per cent in 2012). 

As  shown  in  the  figure  below,  Denmark  is  estimated  to  have  the  lowest  percentage 
loss of excise duty (one per cent) and Latvia has the highest proportion (more than 40 
per  cent).  It  is  worth  noting  that  the  excise  loss  is  not  insignificant  in  large  Member 
States  such  as  France,  Germany  and  the  UK,  at  around  10  per  cent  of  potential 
revenue. Those Central and East European countries which have a land border with a 
non-EU  state  tend  to  have  greater  losses,  generally  at  more  than  20  per  cent  of 
potential  revenue.    This  is  consistent  with  the  observation  that  the  drivers  of  illicit 
consumption include the opportunity to supply (e.g. from illicit production outside the 
EU  –  although  there  is  also  illicit  production  sourced  from  within  the  EU)48  as  well  as 
the demand from consumers for cheaper cigarettes (due to the avoidance of duty) or 
products not otherwise available. 

In the Euromonitor data Ireland also has notably high illicit penetration. Ireland does 
have high retail prices, although so does its immediate neighbor, the UK. On the other 
hand, other sources do not identify high penetration of illicit consumption in the Irish 
market.49 

nature,  various  parties  have  vested  interests  in  either  deflating  or  inflating  illicit  trade  figures,  though 
Euromonitor strives to present the most accepted and realistic estimate of the market. Euromonitor’s illicit 
trade figures include both non-duty paid (NDP, also known as contraband) and counterfeit (fake)”. 
48 This is confirmed by FRONTEX in its Eastern border Annual Overview, 2012, 
http://www.frontex.europa.eu/assets/Publications/Risk_Analysis/EB_AO.pdf 
49 For example, Pricing Policies and Control of Tobacco in Europe (PPACTE), 2010 estimated the illict share 
at below five per cent 

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Figure 11 Excise Duty Gap of Cigarettes by Member State 2012 

Source:  Europe Economics’ analysis of DG TAXUD and Euromonitor data  

The penetration of illicit cigarette consumption varies by Member State. Denmark has 
the  lowest  penetration.  Only  two  Member  States,  Belgium  and  the  UK,  show  steady 
decrease  in  illicit trade  over  the  entire  period  2008–2013  (the  penetration  was  lower 
in 2013 compared to 2008 in Hungary and Slovenia also).  

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Figure 12 Penetration of illicit consumption - Cigarettes 2008-201350 

Source:  Europe Economics’ analysis of DG TAXUD and Euromonitor data (Croatia, Malta, Cyprus and Luxemburg not shown) 

The implementation of the MED does not appear to have had an identifiable effect on 
the situation. In other words, there is no apparent break in national trends around this 
time (illicit consumption’s share rose in some countries, and fell in others).   

This  translates  into  the  estimated  duty  loss  as  below.  Germany,  France,  Poland  and 
the UK have excise losses in excess of €1 billion in at least one year. In general, there 
has  been  an  upward  trend  in the  value  of  excise  duty losses,  the  UK  being  the  most 
notable  exception,  although  excise  duty  losses  fell  in  absolute  terms  in  Belgium  and 
Hungary also. 

50  We  note  that  the  Irish  Tax  administration  considers  the  Euromonitor  estimate  of  illicit  trade  to  be  too 
high.  The  Revenue  Commissioners  and  the  National  Tobacco  Control  Office  of  Ireland’s  Health  Service 
Executive provide annual estimations of the level of the illicit trade in Ireland and for 2013 found that 11% 
of cigarettes consumed in Ireland were estimated to be illicit. 

We note this comment but highlight that all estimates of illicit trade can be subject to substantial margins of 
error  and  the  methodology  can  have  a  significant  impact  on  the  estimates.  To  enable  our  analysis  to  be 
completed  on  a  consistent  basis  across  the  EU  we  therefore  employ  Euromonitor  data  while  bearing  the 
above caveat in mind.   

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Figure 13 Excise Duty Loss - Cigarettes 2008-2013 

Source:  Europe Economics’ analysis of DG TAXUD and Euromonitor data  

The European Commission has noted that cigarettes constitute by far the biggest part 
of  seizures  of  tobacco  products  reported  by  Member  States.51  “Some  significant 
seizures”  of  Hand-rolled  tobacco  (HRT)  have  been  made,  but  other  tobacco  product 
types do not appear in significant numbers.   We note that the (licit) cigarette market 
is significantly larger than that for  HRT which is (generally) larger than that for,  say, 
cigars.    In  that  sense,  these  seizure  data  do  not  provide  strong  evidence  that  illicit 
consumption  in  any  of  these  individual  groups  is  significantly  out  of  proportion  with 
licit consumption. 

With  this  in  mind,  while  it  is  not  possible  to  replicate  this  analysis  for  other  types  of 
tobacco  due  to  a  lack  of  data  on  illicit  penetration,  we  can  provide  an  indicative 
estimate of such losses. We assume that the penetration of illicit trade is the same for 
all types of tobacco.  This may not be borne out in reality, e.g. illicit penetration may 
be  relatively  insignificant  in  some  tobacco  product  categories  –  at  least  in  some 
countries.  Informal feedback from stakeholders suggests that illicit trade is unlikely to 
be  higher  than  that  found  in  cigarettes  for  any  other  tobacco  product  than  it  is  for 
cigarettes.  On this basis, we might consider the estimates presented below to be an 
upper bound to the loss from illicit trade in other product categories.  The lower bound 
would  be  represented  by  the  assumption  of  zero  illicit  trade  in  products  other  than 
cigarettes:  this  would  make  the  estimate  for  illicit  trade  in  all  tobacco  products 
equivalent  to  that  for  cigarettes  only.  We  also  note  that  since  tax  revenues  from 
cigarettes  are  such  a  large  proportion  of  the  total  the  margin  for  error  here  is  not 
likely to be material. 

51 European Commission, “Stepping up the fight against cigarette smuggling and other forms of illicit trade 
in tobacco products - A comprehensive EU Strategy”; COM(2013) 324 final; 6th June 2013 

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Under  this  approach,  we  simply  adjust  the  estimated  excise  duty  loss  to  reflect  the 
composition  of  tobacco  excise  duties  as  shown  in  Figure  10.    This  approach  means 
that the total loss of tobacco excise duties due to illicit trade in cigarettes, cigars and 
other  smoking  tobacco  was  about  €11.1  billion  in  2013,  against  the  €10.4  billion  for 
cigarettes alone.52  This means 93 per cent of the excise duty loss due to illicit trade is 
estimated to be from cigarettes. 

It  is  important  to  note  that  this  calculation  may  overstate  the  true  excise  duty  loss, 
both from cigarettes and from other tobacco.  In particular, the calculation estimates 
the loss of excise duty given the current consumption of legal and illicit tobacco. 

However,  it  is  likely  that  the  total  consumption  of  tobacco  would  fall  if  illicit  tobacco 
were eliminated.  The prices of illicit tobacco products are typically lower than for their 
licit equivalents (we discuss the scale of the price difference further below).  So this is 
equivalent  to  saying  that  the  prices  experienced  by  the  current  consumers  of  illicit 
cigarettes would rise, and hence overall consumption would fall  (i.e. one unit of illicit 
tobacco  would  be  substituted  by  less  than  one  unit  of  legal  tobacco,  given  that  the 
price  of  legal  tobacco  is  greater  than  that  of  illicit  tobacco  and  that  price  elasticity 
estimates  suggest  that  demand  for  tobacco  falls  as  the  price  increases).  This  means 
that  the  above  formula  may  overestimate  the  amount  of  revenue  that  should  be 
considered  ‘lost’  (i.e.  the  additional  duty  revenue  that  would  be  obtained  if  illicit 
consumption  were  eliminated)  because  not  all  of  the  illicit  consumption  would 
translate through to additional licit consumption, and hence additional duty collection. 

Ideally one might use bespoke-price elasticity data to assess this change.  Again, such 
data  are  lacking.    However  there  have  been  numerous  attempts  in  the  literature  to 
estimate  the  own-price  elasticity  of  demand  for  cigarettes,  in  particular,  and  we 
consider  this  to  be  at  the  least  a  good  proxy  for  the  circumstances  which  we  are 
seeking to model.  

We  highlight  various  recent  estimates  used  in  past  studies  (many  of  which  are  from 
the PPACTE project) in the table below. 

Table 7:  Summary of own price elasticity estimates 

Author 

WHO 

Gallus, S.; Schiaffino, A.; La 
Vecchia, C.; Townsend, J.; 
Fernandez, E. 

Country 

Year 

Overall 

Developed 
countries 

2011 

-0.25 to -0.5, cluster around -
0.4 

EU 

2006 

-0.46  vs -0.76 (local vs foreign 
brand) 

Gallus S, Fernandez E, Townsend J.  

IT 

2003 

-0.43 

Fernandez E, Gallus S, Schiaffino A. et al  

ES 

2004 

-0.19 to 1.25 

HMRC 

Escario and Molina  

Escario and Molina  

Mindell and Whynes 

Escario and Molina  

Escario and Molina  

Bask and Melkersson 

UK 

AT 

DE 

NL 

NL 

ES 

SE 

2010 

‐1.17 and ‐0.92 

2001 

-0.83 

2001 

-0.42 

2000 

-0.74 (1970-1980) and -0.54 
(1985-1995) 

2001 

-0.75 

2001 

-2.28 

2004 

-0.65 to -1.03 long run 

52 This scaling up relies on the proportions from 2012. 

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Author 

Country 

Year 

Overall 

Lien Nguyen, Rosenqvist, Pekurinen 

Lien Nguyen, Rosenqvist, Pekurinen 

Lien Nguyen, Rosenqvist, Pekurinen 

Lien Nguyen, Rosenqvist, Pekurinen 

Lien Nguyen, Rosenqvist, Pekurinen 

Lien Nguyen, Rosenqvist, Pekurinen 

Lien Nguyen, Rosenqvist, Pekurinen 

Lien Nguyen, Rosenqvist, Pekurinen 

FI 

FR 

DE 

ES 

IE 

IT 

PT 

SE 

2012 

2012 

2012 

2012 

2012 

2012 

2012 

2012 

Lien Nguyen, Rosenqvist, Pekurinen 

UK 

2012 

-0.22 to -0.413 (short run) -
0.851 to -0.991(long run) 

-0.067 to -0.499 (short run) -
0.913 to -0.384 (long run) 

-0.672 to -0.788 (short run) -
1.098 to -1.284 (long run) 

-0.349 (short run) -0.214 (long 
run) 

-0.265 (short run) -0.59 (long 
run) 

-0.373 (short run) -0.372 (long 
run) 

-0.288 to -0.422 (short run) -
0.869 to -2.54 (long run) 

-0.399 (short run) -0.229(long 
run) 

-0.379 (short run) 1.485 (long 
run) 

Overall,  these  represent  a  heterogeneous  set  of  estimates,  and  we  note  that  various 
studies  have  taken  divergent  steps  towards  controlling  for  changes  in  attitudes 
towards  tobacco  (e.g.  due  to  health  scares)  and  to  tobacco  control  measures  in 
making  their  elasticity  estimates.    Both  of  these  are  likely  to  matter  given  the  time 
periods over which estimates are being made.   

Given the set-up in this evaluation question, and that we are seeking to estimate the 
impact  of  eliminating  illicit  consumption,  we  would  ideally  wish  to  focus  on  the 
elasticity with respect to total consumption. Many of the studies above focus upon the 
impact on licit (specifically duty paid) consumption. These estimates could be biased – 
at least for the purposes being discussed here - due to substitution to, inter alia, illicit 
products,  as  well  as  down-trading  to  cheaper  substitutes  (such  as  RYO)  as  well  as 
reduced overall consumption.53   

In  light  of  these  concerns  we  have  focused  upon  the  WHO’s  estimates  for  developed 
countries.  These are based upon the meta-analysis of a large number of studies and, 
whilst  this  does  not  mean  the  points  raised  above  cease  to  be  issues,  it  is  an 
authoritative source.  The WHO finds that:54 

“Most studies have focused on cigarette smoking, given that cigarettes account for the 
nearly all tobacco use in high-income countries. While these studies have produced a 
wide  range  of  estimates  of  the  magnitude  of  the  effects  of  price  on  overall  cigarette 
consumption, the vast majority of these studies estimate price elasticities in the range 
from -0.25 to -0.5, with most of these clustered around -0.4”. 

In our analysis, we adopt the range of -0.35 to -0.45 (i.e. around 0.4), implying that a 
rise  in  the  price  of  cigarettes  by  10  per  cent  leads  to  a  reduction  in  consumption  of 
between 3.5 and 4.5 per cent.   

53 See for example the discussion by Padraic Reidy and Keith Walsh, Economics of Tobacco: Modelling the 
Market for Cigarettes in Ireland, February 2011.  This paper discusses the potential role of changing demand 
for  non-duty  paid  cigarettes  in  explaining  their  elasticity  estimate  of  -3.6  (whereby  a  one  per  cent  price 
increase results in a 3.6 decline in the quantity of duty-paid cigarettes consumed). 
54 WHO Technical Manual on Tobacco Tax Administration (2011), page 21 

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Of course, such elasticity estimates average out differences between different types of 
consumers.    Typically,  lower  income  and  younger  consumers  are  more  sensitive  to 
changes  in  price  than  are  older  and  higher  income  consumers.  Indeed  the  World 
Health Organization (WHO) has noted that the price elasticity of youths with respect to 
tobacco products lies in the range of -0.5 and -1.2 in high-income countries, which is 
substantially  higher  than  the  estimates  for  adults.55    It  also  notes  that  the 
responsiveness  of  tobacco  demand  to  price  increases  is  higher  among  the  poor  than 
the  rich  in  high-income  countries,  although  no  estimates  of  the  magnitude  of  these 
price elasticities have been identified. 

We  can  use  these  data  to  estimate  the  impact  of  an  increase  in  the  effective  price 
experienced  by  the  current  consumers  of  illicit  tobacco,  and  thereby  refine  our 
estimate of the tobacco excise duty gap. 

If  we  suppose  that illicit  tobacco  were  to  be  eliminated  (e.g.  through  highly  effective 
enforcement  action)  this  would  mean  that  the  only  option  for  purchasing  tobacco 
would be on the legal market. We note that a 2008 study on tobacco smuggling in the 
UK  suggested  that  the  price  of  illicit  cigarettes  was  50  per  cent  cheaper  than  legal 
cigarettes.56  

Therefore,  the  elimination  of  illicit  trade  would  lead  to  an  effective  100  per  cent 
increase in the price of illicit cigarettes (which would equalize the price of the illicit and 
legal variants, assuming that the UK study is representative). 

Given  the  estimated  elasticity  of  -0.35  to  -0.45,  a  doubling  of  the  effective  price 
experienced by consumers of illicit tobacco would reduce demand amongst those that 
previously purchased illicit products by between 35 and 45 per cent (i.e. the sales of 
legal tobacco products would rise by between 55 per cent and 65 per cent of the value 
of previous illicit consumption).   

Therefore, if illicit trade were to be eliminated, excise duty revenues would increase by 
less than the estimated excise duty gap of €11.1 billion.  Indeed, the revenues which 
would  be  captured  would  be  between  55  and  65  per  cent  of  this  figure,  i.e.  by 
between €6.1 billion and €7.2 billion per annum.  

Given  that  the  concept  of  an  excise  duty  gap  should  refer  to  the  amount  of  money 
that tax administrations lose to illicit trade (i.e. the amount that could be recovered if 
illicit  trade  were  eliminated),  we  consider  that  a  reasonable  estimate  of  the  excise 
duty gap is €6.1 - €7.2 billion. 

There are some caveats to this result which we wish to identify here:  

  It is possible, however, that the size of the gap would be lower than this. As 

noted above, younger and poorer consumers are likely to have a higher price 
elasticity of demand than that of other consumers.  Given the sensitivity to price 
of these consumers, we would expect such consumers to be more likely to 
participate in the illegal market than other consumers. 57 Therefore, the increase 

55  Anne-Marie Perucic, (February 2012), “The demand for cigarettes and other tobacco products”, 
Presentation at Dublin TobTaxy Capacity Building Workshop, available at: 
www.who.int/tobacco/economics/meetings/dublin_demand_for_tob_feb2012.pdf 
56 West R, Townsend J, Joossens L, Arnott D, Lewis S. Why combating tobacco smuggling is a priority. BMJ 
2008; 337: 1028-1029 
57 Evidence that illicit consumption is proportionately greater amongst heavy smokers – at least in Italy - is 
presented  by  Joosens  et  al.  Illicit  cigarettes  and  hand-rolled  tobacco  in  18  European  countries:  a  cross-
sectional survey. Tob Control 2014;23:e17–e23 

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in legal sales following the elimination of the illicit market may be less than 
estimated above and hence the excise duty gap may be correspondingly higher.  
The mid-point of the range of price elasticity of youths with respect to tobacco 
products reported by the WHO is -0.85.  This is notably greater price elasticity 
and if these are a disproportionate part of the illicit cigarette buying population 
then the above estimate of the duty gap would be reduced.  

  The data on the price gap between illicit and licit consumption are particularly 

weak. The price gap may vary significantly from the one that we have used, e.g. 
if counterfeit products are the main category within illicit then the price gap 
experienced by consumers might well be less (indeed, a large price gap can act 
as a signal that a product is counterfeit). If the price differential (expressed as a 
% of the duty-paid price) was 25 per cent, then the realizable duty loss would 
be 85–88 per cent of the original figure – against 55–65 per cent with a price 
gap of 50 per cent. 

  The elasticity data draw largely on licit experience only, as we have noted 
above.  In addition, elasticities are typically non-linear, and as such the 
estimates upon which we have drawn may not reflect well the consumption shift 
that would result from such a large price move – nor, indeed, potentially for the 
lower initial price (i.e. price sensitivity is likely to be more at high relative prices 
than at low ones). Similarly the elasticity estimates do no account well for 
potential substitution effects, e.g. from illicit cigarette consumption to licit HRT 
consumption.  These uncertainties mean that the estimate of realizable duty loss 
needs to be treated with appropriate caution. 

On the other hand, as we have noted above, losses from other sources (e.g. from the 
abuse of tobacco product classifications) are omitted from this analysis due to lack of 
data.   

Summary 
Our analysis of the extent to which the current arrangements for tobacco excise duty 
on tobacco products safeguard Member States' budgetary objectives has found: 

  total tax revenues have fluctuated over time both within individual member 

States and across the EU as a whole; 

  60 per cent of all EU tax revenues from cigarettes arose from four Member 

States in 2012 (France, Germany, Italy and the UK); 

  excise duty losses on cigarettes fell between 2008 and 2013 in a few Member 

States but increased in most; 

  the maximum estimated excise duty loss in 2013 was €11.1 billion per annum 

but this assumes that all consumers of illicit tobacco would continue to purchase 
the same amount of tobacco products in the event that illicit trade is eliminated; 
and; 

  adjusting for possible reductions in tobacco consumption following the 

elimination of the illicit market suggests that the excise duty gap is likely to lie in 
the range of €6.1 billion to €7.2 billion per annum. However, if the licit cigarette-
buying population is more price sensitive than the average population, then the 
gap could be lower than this.  On the other hand, inclusion of other drivers of 
duty loss (e.g. misclassification) would drive the gap upwards.  If illicit trade is 
assumed to be absent from all products bar cigarettes then this range would be 
reduced to €5.7–€6.7 billion. 

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An  overall  conclusion  to  the  extent  to  which  the  Directive  adequately  safeguards 
budgetary  objectives  may  only  be  given  once  a  detailed  analysis  of  the 
appropriateness of the arrangements is conducted. This is done in the sections below. 

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Q2.1  To  what  extent  do  the  definitions  of  taxable  products  in  Articles  2-5  of 
Directive  2011/64/EU  allow  for  adequate  (correct  categories  and  rates) 
collection of the due excise duties for manufactured tobacco products? 

The evaluation of the definitions contained in articles 2-5 of Directive 2011/64/EU and 
their  appropriateness  in  relation  to  safeguarding  the  budgetary  interests  of 
the Member States has taken into account two different aspects:  

(a)  Products which are not explicitly defined as excisable tobacco products.  

Specifically,  the  evaluation  has  looked  into  the  potential  impact  on  the  budgetary 
revenues  of  four  major  product  groups:  (i)  raw  tobacco,  (ii)  water  pipe  tobacco,  (iii) 
electronic cigarettes and (iv) expanded tobacco. 

(b)  Tobacco  products  which  are  difficult  to  classify  or  whose  classification  requires 
subjective  interpretation  of  the  law  but  which  otherwise  fall  within  one  of  the 
categories of tobacco products defined. 

In relation to the latter, specific attention has been given to the distinctions between 
cigarettes and cigarillos and between fine-cut tobacco for the rolling of cigarettes and 
the other categories of excisable tobacco. 

The  findings  have  shown  that  budgetary  interests  are  affected  in  different  forms  by 
each  of  the  categories  described  above,  hence  in  the  section  below  each  issue  is 
described and analysed separately. 

Q2.1  (a)  The  treatment  for  excise  purposes  of  tobacco  products  not  defined  by  the 
Directive? 

(i)  Treatment for excise purposes of raw tobacco 
The  current  treatment  of  raw  tobacco  has  a  direct  and  an  indirect  impact  on  the 
budgetary  objectives  of  Member  States.  The  direct  impact  refers  to  situations  where 
economic operators sell raw tobacco directly to consumers, allowing them to produce, 
on a small scale, tobacco products for their own consumption, avoiding the payment of 
the excise duty. 

Member State authorities reported that there have been attempts by economic operators to 
sell non-excisable raw tobacco and, in some instances, place at the disposal of consumers’ 
machines  which  cut  the  tobacco  leaves,  allowing  consumers  to  roll  their  own  cigarettes 
while avoiding excise duty. 

As  described  in  greater  detail  elsewhere  in  this  report 58,  in  a  majority  of  Member 
States,  raw  tobacco  is  not  subject  to  any  specific  treatment  from  an  excise  duty 
perspective.  This  means  that  raw  tobacco  may  circulate  freely  and  could  be  sold  to 
consumers in order for them to manufacture their own tobacco products.  

In  such  systems,  there  would  be  legal  uncertainty  with  respect  to  the  existence  of  a 
legal basis for imposing excise duties, seize or confiscate raw tobacco even when there 
is a suspicion that it would be used for the manufacture of excisable tobacco products 
outside a tax warehouse.  

58 See answers to Q1.3 and Q2.3 

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In Ireland, quantities of unmanufactured tobacco have been detected in situations where it 
was  evident  that  it  was  not  for  legal  manufacture  in  a  tax  warehouse.  To  address  this 
problem,  a  new  legislative  provision  was  introduced  in  Finance  Act  2013  (Section  56)  in 
relation to the use of unmanufactured tobacco in the illicit production of tobacco products.  

 “Where any unmanufactured tobacco is found in the State and where that unmanufactured 
tobacco  is  not  shown  to  the  satisfaction  of  the  Commissioners  to  be  kept,  or  to  be  in  the 
course of delivery— 

(i) under a customs procedure within the meaning of Council Regulation (EEC) No. 2913/92 
of 12 October 1992 
(ii) for use as raw material for the production of tobacco products in a tax warehouse, 
(iii) for use as raw material for the production of any product or thing other than a tobacco 
product, or 
(iv) for any other use that is not contrary to this section, 
then  it  shall be  presumed  until the  contrary  is proved  that  the  unmanufactured tobacco  is 
prohibited goods”.   

In  order  to  prevent  such  situations  from  occurring  (or  put  an  end  to  already 
established  practices,  some  Member  States  have  put  in  place  provisions  which 
regulate (to various degrees) the growing, processing and sale of raw tobacco 59. Even 
in  situations  where  the  Member  States  have  inscribed  in  their  regimes  a  legal  basis 
allowing  the  imposition  of  excise  duties  on  raw  tobacco  or  the  imposition  of  criminal 
fines if quantities were found to circulate outside the established system, a number of 
Member  States  authorities  have  reported  that  the  amounts  of  raw  tobacco  diverted 
from the legal supply chain or being put up for retail sale have been growing.  

In  one  particular  Member  State  with  a  large  internal  production  of  raw  tobacco,  tobacco 
growers  have  to  conclude  contracts  with  first  processors  of  raw  tobacco,  while  first 
processors  of  raw  tobacco  have  to  be  registered  and  may  only  sell  to  authorised 
warehouse  keepers.  Despite  the  fact  that  sanctions  in  relation  with  these  obligations  are 
not  automatic  and  there  are  limited  resources  allocated  for  control,  in  2013  365  Kg  of 
blend  tobacco  (cut  tobacco,  where  an  initial  processing  took  place)  and  274  Kg  of  bulk 
tobacco has been confiscated. 

The  indirect  impact  is  more  significant  and  refers  to  the  situations  described  in  Q2.3 
by which raw tobacco is diverted  from the  “legal” supply chain and used in the large 
and medium scale production of excisable tobacco products outside the premises of an 
authorised  warehouse  keeper,  hence  away  from  the  control  mechanisms  of  Member 
States. 

In  relation  to  the  amounts  of  seizures  of  raw  tobacco,  even  in  the  countries  where  a 
distinction  between  a  “legal”  and  an  “undeclared”  circuit  can  be  made 60,  Member 
States  reported  that  the  legal  uncertainty,  coupled  with  the  lack  of  effective 
monitoring  and  control  measures  on  this  part  of  the  logistics  chain  precludes  them 
from  conducting  targeted  checks  which  may  lead  to  more  seizures,  reflecting  more 
appropriately the size of the problem. 

59 See answers to Q1.3 
60 I.e. those countries which regulate the market for raw tobacco 

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Despite  the  lack  of  mechanisms  in  place  to  adequately  quantify  the  amounts  of  raw 
tobacco  diverted  into  the  illegal  supply  chain,  the  quantification  of  illicit  trade,  as 
included in the excise duty gap section of this report, includes “contraband” (i.e. fake) 
as well as non-duty-paid (NDP) products. Quantities of raw tobacco diverted from the 
legal circuit will serve as raw materials to the “contraband” part of illicit trade and are 
therefore included in the calculation of the excise duty gap.   

(ii)  Treatment for excise purposes of water-pipe tobacco 
Even  though  water-pipe  tobacco  is  not  specifically  defined  by  the  Directive,  it  is 
considered to be an excisable product in all Member States (if containing tobacco) and 
treated, mainly, as other smoking tobacco.61 

The  wide  majority  of  countries  reported  that  they  had  no  problem  in  applying  the 
definition  of  other  smoking  tobacco  in  order  to  apply  excise  duty  on  water-pipe 
tobacco. 

From  this  perspective,  it  could  be  concluded  that  the  lack  of  a  specific  definition  for 
water-pipe tobacco under the current arrangements does not preclude Member States 
to levy excise duty on this product within the framework of Directive 2011/64 EU. 

It  should  be  said  that  the  cross  country  analysis  has  shown  that  in  a  number  of 
Member  States,  water  pipe  tobacco  is  taxed  only  if  it  contains  tobacco,  while  other 
Member  States  apply  excise  duty  regardless  of  whether  the  product  is  fully  or  partly 
made out of substances other than tobacco.  

While  the  budgetary  implications  of  this  limitation62  are  negligible  due  to  the  very 
marginal  consumption  of  those  products  in  the  countries  where  they  are  non-
excisable,  the  inconsistent  treatment  may  cause  other  problems  if  the  products  in 
question  were  to  be  subject  of  cross  border  movements  while  under  suspension  of 
excise  duties.63  When  products  of  this  type  are  imported  from  third  countries,  this 
problem remains a theoretical one, however this becomes an issue if the products are 
destined for consumption in a different country than the one of importation. 

It  is  very  important  to  mention  that  because  the  composition  of  water-pipe-tobacco 
contains  sugars,  molasses  and  other  dense  substances,  its  properties  in  terms  of 
weight  differs  considerably  from  the  other  types  of  products  which  usually  fall  under 
the category of “other smoking tobacco”. Depending on the nature of the market in a 
particular  Member  State,  a  particular  rate  structure  for  this  category  may  not  be 
appropriate  to  apply  to  both  water-pipe  tobacco  as  well  as  the  other  products  within 
“other  smoking  tobacco”.  Being  unable  to  find  an  appropriate  balance  between  the 
consumption patterns and the rate structure may have significant implications on the 
budgetary revenues.  

In conclusion, Member States budgets may be affected by the fact that a specific rate 
structure,  which  would  take  into  account  the  consumption  patterns  and  the  specific 
properties of water-pipe tobacco  cannot be separated from the  rate  structure applied 
to all products falling under the residual category of “other smoking tobacco”.  

61 In accordance with Art. 5(1) (a) Directive 2011/64/EU 
62 I.e. the fact that some countries consider water-pipe tobacco not containing tobacco as non-excisable 
63 Inconsistent treatment for excise duty purposes may also be caused by the fact that water-pipe tobacco is 
classified  under  CN  code  24  03  11  00  according  to  the  subheading  note  1  of  chapter  24.  If  the  product, 
however is a tobacco-free product intended for smoking in a water-pipe it is classified under CN code 2403 
99 90, a CN code which is usually not excisable. – The issue of dual classification is discussed thoroughly in 
Q2.2 of this report. 

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One Member State reported that the entire legal market of water-pipe tobacco disappeared 
(i.e.  all  sale  of  this  type  of  product  turned  illicit)  when  the  structure  of  the  rate  changed 
from  a  purely  ad  valorem  to  a  purely  specific  one.  As  the  consumption  of  water-pipe-
tobacco  in  that  MS  is  fairly  common,  the  budget  implications  are  estimated  to  be 
significant. 

(iii)  Treatment for excise purposes of electronic cigarettes 
The  wording  of  the  definitions  of  Art  2-6  does  not  envision  the  application  of  excise 
duties  on  e-cigarettes  within  the  general  framework  of  Directive  2011/64/EU  due  to 
the fact they contain neither tobacco nor do they imply combustion (hence cannot be 
considered as being “ intended to be smoked”). 

At  present  the  situation  looks  patchy  with  different  Member  States  taking  different 
stands. 

Table 8 Treatment of e-cigarettes in the EU 

Treatment 

Medical device/ product64 

Member State: 

AT, DE, DK, EE65, HU, SE66, FI, PT, EL, LU 
and BE67 

No specific Provisions /Consumer product  
(apart from general product safety legislation) 

CY, DE, EE68, HU69, FI, CZ, MT, ES, IE, NL, 
LV, PL, RO, SI, SK and UK 

Substitute for tobacco products 

IT 

In some countries, due to the nature of the authorisation requirements or the lack of 
implementing regulation for obtaining approval, e-cigarettes are effectively prohibited 
or  banned.  Some  countries  have  reported  that,  even  though  they  find  themselves  in 
such a situation, e-cigarettes are nevertheless present on the market. 

A large number of Member States have expressed the need  for clarity on the part  of 
EU  legislation  with  respect  to  the  treatment  of  e-cigarettes  from  an  excise  duty 
perspective.  

Some of the Member States have reported that they would welcome the application of 
excise duties on e-cigarettes, citing both the need for health protection as well as the 
attainment of budgetary objectives.  

One  large  Member  State  with  a  considerable  market  for  e-cigarettes  expressed  its 
concern that as more economic operators (including the established manufacturers of 
excisable  tobacco  products)  become  involved  with  e-cigarettes,  a  future  shift  of 
consumption  towards  e-cigarettes  can  be  expected.  As  a  result,  the  budgetary 
implications  of  not  including  e-cigarettes  within  the  framework  of  the  EU  Directives 
may prove to be extremely significant.  

64 Subject to specific authorizations overseen by the respective health ministries. 
65 If containing nicotine 
66 If containing nicotine 
67  In  BE  and  LU,  e-cigarettes  are  to  be  treated  the  same  as  tobacco  cigarettes  if  they  contain  tobacco 
extract (if only containing nicotine, BE and LU treat e-cigarettes as a medical product) 
68 If it does not contain nicotine 
69 If it does not contain nicotine 

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The  economic  operators  themselves  raised  concerns  with  respect  to  the  competitive 
distortions caused by differentiated tax treatment between e-cigarettes and cigarettes 
and the inherent substitutability. 

As  a  result  of  the  increased  attention  on  e-cigarettes,  additional  research  has  been 
conducted on the subject, the results of which can be found in Appendix 6 – Research 
note on e-cigarettes (summarised in the text box below). 

E-cigarettes 

Definition 

The  e-cigarette,  commonly  referred  to  as  e-cig,  is  a  hand-held  battery-powered  device 
consisting of an atomizer, a battery and a disposable cartridge. This product is intended to 
imitate  ordinary  cigarettes  in  both  the  appearance  and  the  use,  i.e.  reproducing  the 
“hand-to-mouth” movement. They  do not work through  combustion, in fact they  use  heat 
to vaporise the solution in the cartridge and create an aerosol (or mist) that the “vaper” 
inhales1.  The  nicotine  content  in  the  cartridge  can  range  between  0  and  48  mg/ml.  The 
liquid  does  not  contain  tobacco  except  for  minuscule  quantities  either  due  to  the  tobacco 
flavouring or to the process of extraction of nicotine from tobacco leaves. 

Market development 
Since  2003  where  e-cigarettes  were  first  patented  in  China,  the  market  has  grown 
exponentially,  registering  a  compound  annual  growth  rate  of  57%  which  stands  at  about 
USD 2 billion worldwide. The EU market alone is estimated worth between EUR 400 and EUR 
500  million,  and  is  characterised  by  a  large  number  of  distributors  rather  than 
manufacturers.  Many  of  these  are  still  SMEs,  although  the  interest  by  large  tobacco 
manufacturing companies is growing. 

Classification in EU 
The sudden boom  registered  by  the  e-cigarette market found governments, legislators and 
regulatory agencies around the world unprepared as the legislation in place did not allow 
for classifying these products in a univocal way. 

In the EU, the legislation in place is not clear about what should be taxed. On the one hand, 
Article  2  Council  Directive  2011/64/EU  refers  to  the  presence  of  tobacco  as  the 
discriminating  factor.  However,  on  the  other  hand,  Article  3(1)  of  Council  Directive 
2001/37/EC, while not engaging directly with taxation, mentions other substances, i.e. tar, 
nicotine,  and  carbon  dioxide.  In  the  case  of  e-cigarettes  this  latter  limit  is  only  partially 
applicable as none of the papers consulted mentioned the presence of tar in e-cigarettes and 
only one reported very little concentrations of carbon monoxide. The only anchorage would 
be represented by nicotine which is present in virtually all e-cigarettes and refill liquids.  

Health concerns 
Just  like  the  other  tobacco  products,  e-cigarettes  have  propelled  a  heated  policy  debate 
which  touches  upon  many  different  aspects  such  as  classification,  taxation,  health  issues, 
quality and safety. As for the health effects of “vaping”, contrasting conclusions are found 
in  empirical  research  studies,  making  the  case  for  imposing  excise  duties  on  e-cigarettes 
rest  on  weak  foundations  as  it  is  not  sure  whether  direct  and  indirect  harm  exist. 
Furthermore, at present there exist no international standard regulating the production of e-
cigarettes, cartridges and refill liquids, which may represent a threat to consumers' safety. 

(iv)  Current treatment for excise purposes of expanded tobacco 
Literature and national policymakers pointed towards a growing problem related to the 
increasing  use  of  expanded  tobacco  and  more  specifically,  dried  ice-expanded 
tobacco  (DIET)  –  the  most  commonly  used  manufacturing  process  that  uses  solid 

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carbon  dioxide  (CO2)  in  the  making  of  expanded  tobacco70.  Tobacco  treated  in  the 
DIET process is reordered to a desired moisture content, and is then indistinguishable 
from untreated tobacco. 

Characteristics of DIET tobacco (in detail) 
Cut  tobacco  from  a  conventional  primary  process  is  fed  to  the  CO2  impregnation  system  in 
precisely weighed sub-batches, and impregnated with liquid CO2 at pressures of 30 - 35 Bar. 
The  impregnators  are  filled  with  liquid  CO2  before  being  drained,  depressurised  and  the 
residual gaseous CO2 removed and recovered by re-compression. 
The  frozen  tobacco  is  now  discharged  from  the  impregnators,  and  passes  through  special 
opening doffers to a buffer silo. It is then fed at a controlled mass flow by means of a special 
low-temperature  Weycon  to  the  infeed  of  a  specially  designed  air  dryer  in  which  the  frozen 
tobacco  is  subject  to  a  process  gas  stream  consisting  mainly  of  superheated  steam.  This 
causes the ‘dry ice’ or solid CO2 contained within the tobacco cellular matrix to change state 
from the solid to the gaseous phase (sublimation). Due to the fact that the volume of gaseous 
CO2 is vastly greater than the volume of dry ice, the tobacco is expanded, in some cases to 
double its original volume depending on the nature of the tobacco. 
Following expansion, the product moisture is corrected to the desired final value if necessary, 
and unwanted heavy items (e.g. stems and other contaminants) removed by classification in 
an  Elutriator  (see  other  web  page  for  more  details  of  this  product).The  DIET  material  may 
then be filled into bins or boxes for onward storage and transportation, or may be conveyed to 
silos ready for Addback in the Primary process. 

To  levy  comparable  rates  of  excise  on  fine-cut  tobacco  for  rolling  cigarettes  and  on 
manufactured cigarettes, the weight of tobacco used to prepare hand-rolled cigarettes 
and  manufactured  cigarettes  must  be  established.  The  current  conversion  rate 
suggests  that  1  kg  of  fine-cut  tobacco  is  equivalent  to  1000  cigarettes  (1g  =  1 
cigarette)71; Some Member States, however, believe that this implied ratio is incorrect, 
particularly  with  the  increasing  use  of  dry  ice-expanded  tobacco  manufacturing 
processes, which reduces the mass of tobacco in a manufactured cigarette.  According 
to the ISO norm on measuring tar and nicotine in hand-rolled cigarettes (ISO15592–
3:2008)72 there are 0.4–0.75g of tobacco per hand-rolled cigarette. This suggests that 
1333–2500 hand-rolled cigarettes can be made from 1 kg of fine-cut tobacco73, rather 
than 1000.  

In line with the apparent evidence suggested by the ISO norm, a few Member States 
have  pointed  out  that,  as  a  result  of  the  increasing  use  of  expanded  tobacco  in  the 
production  of  fine-cut-tobacco,  the  resulting  increase  in  volume  essentially  allows 
consumers to make a higher number of hand-rolled cigarettes, with the same weight 
of  product,  while  paying  the  same  amount  of  excise  tax.  This  statement  is  partially 
disputed  by  economic  operators,  which  argue  that,  given  its  properties,  expanded 
tobacco  burns  more  quickly  than  normal  tobacco  hence  consumers  would  simply  roll 
more  cigarettes  in  order  to  compensate,  thereby  negating  the  potential  excise  duty 
loss.  

70 Stevenson/Proctor, The Secret and Soul of Marlboro, American Journal of Public Health2008, p. 1185. 
71 The conversion rate is implicit, assumed from the rate structure which levies excise duties per 1000 sticks 
in  the  case  of cigarettes  and per  kg  in  the  case of fine-cut  tobacco.  This  conversion  rate,  however,  is  not 
made explicit or legally established as a basis for calculation. 
72  ISO15592–3:2008:  Fine-cut  tobacco  and  smoking  articles  made  from  it  --  Methods  of  sampling, 
conditioning  and  analysis  --  Part  3:  Determination  of  total  particulate  matter  of  smoking  articles  using  a 
routine analytical smoking machine, preparation for the determination of water and nicotine, and calculation 
of nicotine-free dry particulate matter. 
73 Fine-cut-tobacco in which expanded tobacco may account for 0 to 100% of the blend 

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According to reported figures, in Germany, expanded tobacco accounted for 28,8% of the 
market  for  fine  cut-tobacco  in  2012,  which  translates  into  8140  tons  of  expanded  roll-
your-own.  The  German  tax  authorities,  based  on  their  own  experiences  in  dealing  with 
expanded  tobacco  assumed  that  a  consumer  would  use  0.75gof  normal  roll-you-own 
tobacco  but  only  0.6g  of  expanded  tobacco  for  each  cigarette.  As  a  result  of  the  weight 
assumptions  made  by  the  German  authorities;  10  175  tons  of  tobacco  instead  of  8140 
would have been consumed.  

At a tax level of 63,04 EUR/1kg, the budgetary impact would be 128 286 400 EUR. 

As the current wording of the Directive makes no distinction between regular tobacco 
and  expanded  tobacco  for  excise  duty  purposes,  which  may  have  an  effect  on  the 
budgetary  objectives  of  Member  States,  this  present  evaluation  has  further 
investigated the issue of expanded tobacco, its use and treatment across the MS. 

From a budgetary objective perspective, the use of expanded tobacco plays a role only 
when it is being used in the production of excisable tobacco products which are taxed 
according  to  their  weight  (through  the  mechanisms  explained  above).  The  use  of 
expanded tobacco in the manufacturing of cigarettes has no impact on the revenues of 
Member States. 

The inconsistent treatment of expanded tobacco caused by unclear definitions or dual 
coding  of  tobacco  products  can  have  an  impact  on  the  control  mechanisms  and  the 
administrative  and  compliance  costs.  Such  aspects  are  discussed  at  length  in  Q2.2, 
Q4.1 and Q4.2 respectively. 

The use of expanded tobacco in the EU 
From  the  perspective  of  excise  duties,  Member  States  do  not  seem  to  give  much 
consideration  to  expanded  tobacco  and  have  not  investigated  or  researched  the 
volumes and uses of expanded tobacco. Only two countries (DE74 and HU75) are aware 
of the volumes of expanded tobacco present in their markets.  

In order to complement this lack of data, economic operators were asked to report on 
the use of expanded tobacco in the manufacturing of excisable tobacco products.  

It showed that a very wide majority of respondents (94%) use DIET or another kind of 
expanded tobacco in the tobacco production, while only 6% do not use it.  Figure 14, 
below  shows  how  DIET  tobacco  is  used  in  the  manufacturing  of  excisable  tobacco 
products. 

74  Germany  estimates  that,  in  2012  approximately  8000  tonnes  of  expanded  tobacco  was  released  for 
consumption and sold as fine-cut tobacco. 
75 On the basis of voluntarily reported data from economic operators, the Hungarian authorities were able to 
estimate that 2830 tonnes of expanded tobacco, accounting for 40% of the market for fine-cut-tobacco was 
released for consumption in 2012. 

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Figure 14 Use of DIET tobacco in manufacturing tobacco production (N=36) 

As shown by the graph, the majority of  respondents use it for  “other” purposes than 
the  ones  they  were  presented  for  in  the  survey  questionnaire.  The  reasons  for  the 
over  representation  of  the  option  ”other”  is  that  expanded  tobacco  is  used  in  the 
production of all types of excisable products and not just one in particular. 

Respondents  explained  that  DIET  tobacco  becomes  part  of  the  so-called  dry  blend 
recipe,  which  is  used  together  with  other  components  such  as  raw  tobacco,  tobacco 
stem or homogenised tobacco in the production of all types of manufactured products.  

The inclusion level of expanded vs non expanded tobacco in the products ranges from 
0% to 100% depending on the taste, strength and delivery of smoke ingredients.  

According  to  one  respondent,  expanded  tobacco  is  moreover  assumed  to  lower  the 
yield  of  tar,  nicotine  and  carbon  monoxide,  therefore  assisting  to  meet  the  EU 
requirement laid down by Directive 90/239/EEC. 

It  should  be  regarded  that,  from  the  analysis  of  the  answers  of  economic  operators 
and those  of Member States, the use of  expanded tobacco is much more widespread 
than  previously  thought,  as  it  serves  as  an  essential  ingredient  in  the  production  of 
tobacco products. As a result, particular attention should be given with respect to the 
treatment of this type of product not only from a budgetary perspective, but from the 
perspective of the control and monitoring mechanisms. 

The treatment of expanded tobacco by Member States 
With  respect  to  the  finished  product,  as  mentioned  above,  Member  States  make  no 
distinction of whether the fine-cut-tobacco released for consumption consists in whole 
or in part of expanded tobacco; as such, any expanded tobacco that otherwise fits the 
criteria of fine-cut-tobacco will be treated as such in all Member States. 

56 

0%10%20%30%40%50%60%70%Ingredient in themanufacturing ofcigarettesIngredient in themanufacturing offine-cut tobacco forthe rolling ofcigarettesIngredient in themanufacturing ofother smokingtobaccoOtherWhat is the use of DIET tobacco? 
 
 
 
 
 
 
 
 
 
 
 
 
 
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A  particular  important  aspect  to  take  into  account  in  this  respect  is  that  it  is  very 
difficult to distinguish between expanded and non-expanded tobacco, especially if the 
blend of tobacco is comprised of both expanded as well as non-expanded tobacco. 

Customs laboratories consulted in the course of this evaluation mentioned that there is 
currently  no  method  by  which  they  may  ascertain  the  inclusion  level  of  expanded 
tobacco  in  a  particular  tobacco  blend;  hence  any  differentiated  treatment  of  fine-cut 
tobacco  on  the  basis  of  whether  it  contains  expanded  tobacco  or  not  would  be 
technically  impossible  unless  an  intermediary  table  which  would  establish  reference 
values  for  different  blend  percentages  and  their  equivalent  flotation 76  degrees)  (i.e.  a 
tobacco  blend  which  contains  x%  expanded  tobacco  has  a  floatability  degree  of  y%) 
was established and made legally binding. 

The  method  prescribed  in  the  Annex  I  of  Commission  Regulation  3311/86 77  is  not 
suitable  for  distinguishing  between  expanded  or  non-expanded  fine-cut  tobacco  as  it 
only serves to classify cut expanded tobacco in what is now CN code 2403 99 90 (non-
excisable). 

With  respect  to  the  treatment  of  expanded  tobacco  as  an  intermediary  product,  this 
evaluation  has  found  evidence  of  inconsistent  treatment  for  excise  purposes  as  a 
result of the application of subjective definitions of excisable tobacco products and of 
the  dual  coding  system.  However,  subject  to  the  explanations  given  in  the  present 
section,  it  has  found  no  evidence  of  a  direct  impact  on  the  budgetary  revenues  of 
Member States.  

In  should  be  noted,  on  the  other  hand  that,  as  the  inconsistent  treatment  has 
significant implications with respect to monitoring and control functions, administrative 
and compliance costs, it is treated thoroughly in Q2.2, Q4.1 and Q4.2 respectively. 

(v)  Other 
Directive 2011/64/EU does not define smoke free tobacco as excisable, mostly due to 
the  fact  that  Directive  37/2001/EC  bans  the  sale  of  tobacco  for  oral  use  in  most  EU 
countries78.  

As a result of this, the consumption of smokeless tobacco (e.g. chewing tobacco, oral 
and  nasal  snuff)  across  the  EU  is  limited  and,  according  to  responses  for  MS 
authorities,  mostly  concentrated  in  very  few  countries  (e.g.  Denmark,  Sweden, 
Finland, Estonia and Italy.) 

In the context of this evaluation, on the basis of responses from Member States, the 
impact  on  the  budgetary  objectives  of  the  non-inclusion  of  smokeless  tobacco  as 
excisable tobacco products at EU level is considered to be marginal, especially due to 
the  fact  that  Member  States  in  which  consumption  of  these  types  of  products  takes 
place  have  enacted  national  consumption  taxes  with  similar  functions  as  an  excise 
duty. 

The volumes and treatment of these products are summarised in Table 9 below.  

76 As expanded cut tobacco differs from non-expanded cut tobacco in that it is less dense, it is necessary to 
determine  methods by  which  customs  laboratories  may  decide  at what  difference  in  the  level  of density  it 
can be established that a particular tobacco blend is expanded, and to what extent. 
77 Commission Regulation (EEC) No 3311/86 of 29 October 1986 on the tariff classification of goods 
78 Art 8, Directive 37/2001/EC 

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Table 9 The volumes and treatment of certain types of smokeless tobacco in MS where they are present 

Product and Country 

Treatment 

Taxed Volume 

Snuff – DK  

Subject to a national excise duty  

25.500 kg  

All types of smoke free 
tobacco (chewing tobacco, 
Kardusskrå and snus) - DK 

Subject to a national excise duty 

9000 Kg 

Chewing tobacco - EE 

Subject to a national excise duty 

n/a 

All types of smoke free 
tobacco products (chewing 
tobacco and oral snuff) - FI 

Subject to a national excise duty 

2010 - 1400 kg, 

2011 - 10 kg  

2012 - 15 kg79 

Moist snuff - SE 

Subject to a national excise duty 

11 500 Kg  

All types of smoke free 
tobacco products not banned 
by Directive 37/2001/EC - FI 

Subject to a national consumption 
tax similar to excise duty 

17 000 kg 

Q2.1  (b)  Reported  instances  of  tobacco  products  which  are  difficult  to  classify  or 
whose classification requires subjective interpretation of the law (borderline products) 

In  order  to  assess  the  appropriateness  of  current  definitions,  from  a  budgetary 
perspective,  this  evaluation  question  is  concerned  with  whether  products  which  are 
difficult to classify or whose classification requires subjective interpretation of the law 
(borderline  products)  are  subjected  to  fair  (correct  categories)  and  uniform 
(consistent treatment across Member States) taxation.  

Particular emphasis is given to the distinction between cigarettes and cigars/cigarillos, 
however, where relevant, any other identified cases will be included and analysed. 

In order to complete the analysis regarding “borderline” products, the report presents 
the findings of the evaluation in four distinct parts:  

  Two individual sections summarise the current situation as reported by Member 

States and economic operators80.  

  The third section contains a detailed analysis of the sources and underlying 

drivers which lead to or have exacerbated the disputes or difficulties in 
classification. 

  Finally, the last part looks at the evidence that can be drawn from a quantitative 

analysis of the extent of the problem. 

Reported difficulties in interpretation by Member States 
Thirteen  Member  States  (FI,  DE,  LT,  LV,  SK,  HU,  NL,  GR,  PT,  CZ,  ES,  IT,  PL,)  have 
reported  that  they  have  had  experience  with  products  which,  in  their  opinion,  were 
potentially  attempting  to  abuse  the  definitions  of  Directive  2011/64/EU  with  the 
purpose of obtaining preferential tax treatment.  

These countries have expressed significant concern that the preferential rate structure 
of  cigars  /  cigarillos  creates  substantial  incentives  for  economic  operators  to  market 
products  which  are,  in  essence,  cigarette  substitutes  (with  respect  to  their  size, 
appearance,  smoking  time,  production  methods,  etc.)  but  which  otherwise  fulfil  the 
minimum requirements of the definitions in order to be classified as cigars / cigarillos. 

79  All  volume  regards  quantities  brought  by  consumers  from  Sweden  (the  drop  in  taxed  amounts 
corresponds to a ban on acquiring snus via internet. 
80  The  reported  statements  are  qualified  through  cross-country  analysis  to  identify  trends  and  underlying 
drivers. 

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The rest of Member States have  reported that they have had no practical experience 
with  any  products  on  their  market  which  were  attempting  to  abuse  the  definitions  in 
search  for  a  better  tax  treatment.  These  Member  States  considered  that  no  such 
problems  arose,  despite  the  potential  risk  of  abuse  being  present  as  a  result  of  two 
possible reasons:  

  The rates between the different types of excisable tobacco products are more or 
less aligned, either through a rate structure similar to that of the higher taxed 
product, or through a rate structure which is appropriate in light of taxing both 
the expensive, high-end cigars as well as cheap cigarillos (e.g. through the 
imposition of a purely ad-valorem rate structure, with an minimum tax floor 
(MED) imposed at the same level as the MED applied for cigarettes). The 
Member States concerned report that, as a result of the rate structure, the 
incentive of trying to market “borderline” products does not exist. 

  There is no real demand on the market for “borderline” products as consumers 

are generally loyal to the traditional cigarette brands. 

As it is beyond the remit of this evaluation to pass individual judgement on the correct 
classification in an excise tax category of products whose classification proved difficult 
or  has  caused  disputes,  administrative  cases  or  judicial  proceedings,  the  analysis  is 
limited  to  presenting  the  cases  which  have  been  reported  by  tax  administration  to 
have caused difficulties. The analysis includes the nature and legislative source of the 
dispute,  outcomes  of  the  dispute  and  on  the  treatment  of  the  product  in  other  MS 
where it is present. Our findings are summarised in Appendix 7 – Analysis of products 
whose classification requires subjective interpretation of the law. 

Any impacts that the subjective interpretation and the ensuing dispute has had on the 
costs of administrations and economic operators involved is discussed as part of Q4.1 
and Q4.2. 

It  must  be  noted  that  a  number  of  countries  appear  disproportionately  among  the 
examples  where  disputes  have  taken  place,  the  reason  behind  this  over-
representation  (in  addition  for  the  existence  of  a  higher  incentives  due  to  the  rate 
structure)  is  that  in  those  countries,  national  processes  of  “classification”  are 
performed  systematically,  as  opposed  to  other  systems  in  which  “classification”  is 
based purely on self-reporting by manufacturers and consignors. As a result of this, it 
is  our  assessment  that  the  lack  of  disputes  (hence  the  lack  of  reported  ‘borderline’ 
products  in  the  remaining  countries  may  also  result  from  the  lack  of  systematic 
classification  procedures81  and  does  not  exclude  the  possibility  of  similar  products 
being present on the market of some of the countries which did not report having had 
experience or disputes with ‘borderline’ products.    

Reported difficulties by economic operators 
When  asked  about  the  extent  with  which  definitions  of  excisable  tobacco  products  in 
Directive 2011/64/EU are  open to  subjective interpretation, the majority of economic 
operators  consider  them  to  be  subjective  to  a  high  extent  (66%),  while  this  aspect 
seems  to  be  less  of  an  issue  for  those  17%  of  respondents  who  answer  “to  a  low 
extent”  and  the  15%  of  respondents  who  consider  the  definitions  to  be  clear  and 
concise. Figure 15, below depicts the responses by operator type. 

81 This is further explained in Q2.2(a). 

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Figure 15 Definitions of excisable tobacco products and subjective interpretation, by economic operator type 

Note:  Numbers  and  percentages  do  not  sum  up  to  47  responses/100%,  as  respondents  were  given  the 
possibility to provide answers for more than one Member State. 
There is only one reply representing tobacco growers and retailers, respectively. 

As  depicted  by  the  graph,  the  issue  of  subjective  interpretation  seems  to  be  rather 
equally distributed across operator types when taking the number of respondents into 
account  (there  is  only  one  reply  representing  tobacco  growers  and  retailers, 
respectively which explains the 100% response rate for "a high extent"). 

However,  when  accounting  for  the  relatively  large  share  of  respondents  representing 
Philip Morris International we receive a slightly different picture, as depicted in  Figure 
16. 

Figure 16 Definitions of excisable products and subjective interpretation, by company cluster 

60 

0%10%20%30%40%50%60%70%80%90%100%Tobacco grower (N=1)Manufacturer ofcigarettes (N=32)Manufacturer of cigars/cigarillos (N=32)Manufacturer of rollingtobacco (N=33)Manufacturer of othersmoking tobacco(N=28)Wholesaler (N=21)Retailer (N=1)Other (N=28)To what extent are the current definitions of excisable tobacco products in Directive 2011/64/EU open to subjective interpretation?To a very highextentTo a highextentTo a lowextentDefinitions areclear andconcise0%10%20%30%40%50%60%70%80%90%100%Philip MorrisInternational (N=28)Other companies (N=19)To what extent are the current definitions of excisable tobacco products in Directive 2011/64/EU open to subjective interpretation?To a very high extentTo a high extentTo a low extentDefinitions are clear andconcise, they leave noroom for interpretation 
 
 
 
 
 
 
 
 
 
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

The graph shows that all respondents representing PMI answered the same way (“to a 
high extent”), while the share of those who consider definitions particularly subjective 
is  considerably  lower  among  respondents  from  other  companies  (16%).  42%  within 
the  latter  group  think  that  definitions  are  subjective  only  to  a  low  extent,  while  well 
over a third considers them to be clear and concise.  

A  number  of  the  most  recent  disputes  involved  PMI’s  own  products;  hence  PMI  may 
have been affected by the legal uncertainty to a higher extent than its peers. 

When  accounting  for  the  over-representation  of  PMI82,  the  results  of  the  survey  to 
economic  operators  would  conclude  that,  overall,  economic  operators  tend  to  believe 
that  definitions  are  clear  or  open  to  subjective  interpretation  to  a  low  extent.  An 
important percentage (approx. 20%) of economic operators, however, tend to believe 
that definitions are open to interpretation to a high or very high extent.  

In  the  subsequent  open  question  the  respondents  elaborate  on  their  replies.  The 
respondent describe, while the definitions are clear for most products, some elements 
of  the  definitions  are  subject  to  interpretation.  The  definitions  mentioned  (by  several 
respondents) regard the definition of Art 4(1): 

  “Normal consumer expectation” 

  “Exclusively intended to be smoked as they are”  

The large majority of answers considering the definitions to be subjective had specific 
regard to the distinction between cigarillos and cigarettes. 

A  number  of  respondents  mentioned  that  in  some  markets  (e.g.  Spain,  Portugal, 
Latvia,  Lithuania)  “little  cigars”  or  cigarillos  are  marketed  as  cigars,  with  a  lower 
excise duty, while the product, according to some of the respondents, actually should 
be considered as cigarettes for excise duty purposes as the products are considered a 
substitute  for  cigarettes.  The  lower  excise  duty  of  cigarillos  results  in  a  lower  retail 
price for the product and this is thought to distort competition with cigarettes.  

One  respondent  suggests  that  the  definition  of  Art  4  should  be  amended  along  the 
lines of "a type of cigar or cigarillo which is similar in many respects to a cigarette is 
treated as a cigarette for excise purposes" or to differentiate in the directive between 
manufacturing  process  i.e.  "machine-made  similar  to  that  for  cigarettes"  and  "hand-
made with the labour intensive production". 

Detailed analysis of the disputed provisions 
The cases presented in Appendix 7 – Analysis of products whose classification requires 
subjective interpretation of the law as well as the responses from economic operators 
indicate  there  are  some  aspects  of  the  definitions  of  excisable  tobacco  products  of 
Directive  2011/64/EU  which  merit  closer  inspection  and  review.  These  are  (in  the 
order in which they appear in the Directive): 

  Art 4 (1) “given their properties and normal consumer expectations is 

exclusively intended to be smoked as it is”.    
Although this provision is useful for arguing against the abusive classification of 
certain products seeking the preferential tax treatment of cigars/cigarillos (e.g. 
Gulliver’s, Partner, Break cigars), due to the fact that this is a subjective, 
interpretable argument, it is a source of disputes and legal uncertainty. 

82 on the principle of one economic grouping = one vote 

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o  To be more specific, Member States are of the opinion that this provision can 
be  interpreted  in  two  ways:  on  the  one  hand  that  they  are  intended  to  be 
smoked like a cigar, so not like a cigarette, or on the other hand: that there 
needs to be no other action (e.g. cutting, reprocessing of ingredients, using 
the  filling  to  make  more  cigarettes,  etc.)  before  being  smoked.  This 
provision  should  be  revised  to  ensure  legal  clarity  and  eliminate  legal 
uncertainty and costly disputes. 

  Art 4(1) (a) “rolls of tobacco with an outer wrapper of natural tobacco”. 

With respect to this provision, this evaluation has identified two problems. First, 
products in this category are subjected to diverging classification for customs 
and excise purposes on the basis of whether the filter is covered by the wrapper 
or not, a problem that does lead to additional costs for administrations and 
operators. As will be substantiated in subsequent questions, the two definitions 
should be harmonised in order to reduce unnecessary costs and eliminate legal 
uncertainty of treatment. It is our assessment, however, that this inconsistency 
is not the main driver behind the increasing number of disputes. 

The second problem is more substantial and concerns the risk that products are 
being designed to objectively fit this definition while otherwise presenting a 
subjective similarity to cigarettes (see problem regarding Art 4 (1). As a result of 
the evidence collected in the context of this evaluation, it cannot be excluded 
that manufacturers introduce products which fit the legal definition of 
cigars/cigarillos but otherwise have similar characteristics to cigarettes (in terms 
of size, smoking time, production means, and consumer expectations), especially 
in light of the substantial number of reported cases from Member States. This 
problem revolves around the principle of “fair taxation” by which products that 
exhibit very similar properties should be considered equally from a taxation point 
of view. In order to overcome this problem, two non-mutually exclusive solutions 
are possible:  

o  The  first  solution  requires  the  redesign  of  the  logic  behind  the  preferential 
tax  treatment  of  cigarillos  and  an  overhaul  of  the  definition  to  correctly 
reflect this logic. It would be necessary to establish the subjective elements 
which  distinguish,  from  an  excise  tax  perspective,  cigars/cigarillos  from 
cigarettes?  (These  can  be,  for  example,  the  production  methods  (more 
labour intensive), smoking time, the fact that smoke is not inhaled, the fact 
that cigars are consumed in smaller quantities and with less frequency than 
cigarettes?) 

o  The  second  solution  involves  maintaining  the  current  definition  but 
eliminating the incentive to market these “borderline” products through the 
application  of  carefully  designed  rate  structures.  The  objective  of  these 
structures  would  be  to  tax  products  which  are  subjectively83  similar  to 
cigarettes  with  a  comparable  rate  to  that  of  cigarettes  while  not 
disproportionally  affecting  the  taxation  of  other  products  within  the 
cigar/cigarillo  category.  Potential  rate  structures  which  may  serve  this 
purpose  are:  (i)  High  ad-valorem  with  an  MED  for  cigars/cigarillos  equal  to 
the MED (or the excise tax applicable at the level of the WAP) for cigarettes; 
or (ii) High specific rate  

  Art 5(1) (a) “capable of being smoked without further industrial processing”. 

This provision, which reduces the administrative burden on legitimate economic 
operators, creates legal uncertainty with respect to the treatment of partially 

83 These products will generally have a small per unit price because they would usually be mass produced. 
They are sold in relatively larger quantities (e.g. in packs of 19 or 20) because their smoking time is low 

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processed tobacco put up for sale with the intention of being smoked. – 
Additional clarification with respect to the meaning of “industrial processing” or a 
revision of the provision (e.g. to read “without further processing in a tax 
warehouse”) is required eliminate this uncertainty. This solution, however, will 
not be sufficient to overcome the negative impact of this delimitation in scope on 
the monitoring and control function (discussed in Q2.2). – Should this provision 
change to say “capable of being smoked,” a smoking test is necessary to define 
a legally binding objective method which can determine what can be smoked. 

  Art 5(1) (b) “put up for retail sale and which can be smoked”. 

In the current form of this provision, the treatment of bulk tobacco refuse put up 
for sale is unclear. In order to remove this legal uncertainty, the provision can 
be made less ambiguous by removing the word “retail”. A smoking test will still 
be required. 

Q2.1  (c)  Volume  /  quantity  of  products  whose  treatment  was  reported  to  be 
problematic 

In  order  to  get  a  quantitative  indicator  in  terms  of  hypothetical  budgetary  impact 
relevant to the issues discussed above, this evaluation proposed to gather data on the 
volumes / quantities released for consumption in the countries where the product was 
reported to be involved in a dispute related to its classification.  

Unfortunately, Member States were not in position to offer data broken down at such 
level of detail (in most cases, data was not available). 

As an alternative, the evaluation has quantitatively analysed the consumption patterns 
of  cigarettes,  cigars,  cigarillos84  and  roll-your-own  tobacco  in  order  to  assess  the 
extent to which the risk expressed by Member States (that certain types of cigarillos, 
are  abusing  the  definitions  in  order  to  gain  a  preferential  tax  treatment)  can  be 
substantiated with quantitative data. 

Assuming  the  premise  that  the  products  concerned  are  subjectively  similar  to 
cigarettes,  they  would  be  seen  as  direct  substitutes  and  a  tax  induced  increase  of 
consumption of cigarillos in the detriment of cigarettes will be observed, especially in 
the context of growing excise duties on cigarettes. 

Before presenting the results of such an analysis, it is necessary to mention that it is 
rather difficult to identify the impact of excise duties on the consumption of a product. 
More specifically, the only way in which excise duties can affect consumption decisions 
is via an impact on retail prices. If manufacturers absorbed all duty increases or took 
the profits afforded to them by a preferential tax treatment such that the retail price 
remained  unchanged  (or  similar  to  those  of  cigarettes),  there  would  be  no  impact  of 
excise  duties  on  consumption,  as  consumers  respond  to  retail  price  changes,  not 
excise duty changes.   

This fact makes the analysis somewhat complex as there are many factors  other than 
excise  duties  that  affect  retail  prices.   In  addition,  there  are  many  influences  on 
consumption behaviour other than retail prices (e.g. real household incomes).  

That said, the data included in our report do seem to show evidence of down-trading 
by  consumers.   The  clearest  example  of  this  is  the  fact  that  cigarette  sales  have 
generally fallen over time as prices have risen while RYO tobacco sales have generally 

84 In the available dataset, cigarillos are defined as miniature cigars weighing less than 3 grams each, with a 
ring gauge of <29. 

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risen  (particularly  in  countries  where  the  economy  has  performed  poorly  in  recent 
years such as Spain, Portugal and Greece).    

With respect to whether “borderline” cigarillos are in fact trying to abuse a preferential 
tax  treatment,  it  is  interesting  to  note  that  sales  of  cigars  have  generally  fallen  over 
time  despite  relatively  flat  prices,  whereas  sales  of  cigarillos  have  increased  in  some 
Member  States.   An  interesting  case  here  is  Spain,  where  sales  of  cigarillos  rose 
during  the  same  period  as  prices  of  cigarettes  rose  and  sales  fell.  The  case  of  Latvia 
(described below) is equally interesting.  

Latvia,  which  reported  that  the  emergence  of  borderline  cigarillos  has  been  problematic, 
shared  consumption  data that  indicates  a decline  of  cigarette  sale  of  22%  coupled  with  a 
2089% increase in the consumption of cigars and cigarillos. 

Cigarettes (in thousands of units) (-22.83% change, or 523 830 thousand units) 

  2,294,348 (2009) 

  1,770,518 (2010)                             

Cigars  and  cigarillos  (in  thousands  of  units)  (+2089%  increase,  or  127  187 thousand 
units)       

   6088 (2009) 

  133,275 (2010)   

The  dramatic  increase  can  almost  entirely  be  attributed  to  Partner  Cigarillos,  as  125  526 
thousand  pieces  (2010)  and  116  375  thousand  pieces  (2011)  were  released  for 
consumption. They were not present on the market in 2009. 

Table 10 contains consumption data for cigarillos (in million units)  in the most recent 
years, for which complete data is available. 85  

As  can  be  seen  in  the  table,  in  many  EU  countries,  predominately  in  the  countries 
which  have  reported  no  problematic  issues,  the  consumption  of  cigarillos  represents 
only  a  fraction  of  the  market  for  excisable  tobacco  products.  While  it  can  be  argued 
that  the  disputed  cases  which  have  been  reported  are  limited  to  only  a  number  of 
countries,  and  that  at  EU  level  the  extent  of  the  problem  is  relatively  marginal 
compared  to  the  overall  consumption  of  excisable  tobacco  products,  the  hypothetical 
budgetary  implication  on  some  of  the  individual  countries  which  have  reported 
problems (e.g. LV; NL; DE; EL) may be significant. 

Table 10 Consumption of cigarillos (in million units) in the EU in 2011 and 2012 

Country 

Bulgaria 

Croatia 

Czech Republic 

Estonia 

Hungary86 

2011 

2012 

5.0 

1.6 

12.1 

4.0 

11.8 

5.0 

1.6 

12.3 

4.4 

14.2 

85  In  this  dataset,  cigarillos  are  defined  as  miniature  cigars  weighing  less  than  3  grams  each,  with  a  ring 
gauge of <29. 
86 As a result of the expiry on December 31’st 2014 of the derogation given to Hungary and Germany in the 
application  of  the  definitions  for  cigars/cigarillos  (Art  4(2)  it  is  expected  that  a  proportion  of  the  products 
which are shown to be cigarillos in this dataset to be re-classified as cigarettes for excise purposes. 

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Country 

Latvia 

Lithuania 

Poland 

Romania 

Slovakia 

Slovenia 

Austria 

Belgium 

Cyprus 

Denmark 

Finland 

France 

Germany87 

Greece 

Ireland 

Italy 

Luxembourg 

Malta  

Netherlands 

Portugal 

Spain 

Sweden 

United Kingdom 

Summary 

2011 

122.4 

55.2 

8.7 

6.2 

2.5 

1.1 

86.2 

240.5 

0.2 

35.7 

2012 

93.0 

57.1 

9.5 

6.4 

2.6 

1.3 

90.2 

242.7 

0.2 

35.6 

115.8 

120.5 

1,290.8 

1,280.0 

3,943.2 

3,884.6 

60.0 

4.8 

55.2 

4.9 

335.7 

338.8 

18.5 

0.7 

305.5 

74.0 

18.8 

0.7 

306.6 

69.1 

1,469.6 

1,769.4 

36.8 

305.7 

36.2 

292.1 

Our  analysis  of  the  extent  to  which  definitions  of  taxable  products  in  Articles  2-5  of 
Directive  2011/64/EU  allow  for  adequate  (correct  categories  and  rates)  collection  of 
the  due  excise  duties  for  manufactured  tobacco  products  provides  the  following  key 
findings: 

  In light of the growing consumption of e-cigarettes, as a substitute to excisable 

tobacco products, the long-term budgetary implications of not including e-
cigarettes within the framework of harmonised excise duties may prove to be 
significant. 

  Differences in the level of taxation between excise duty categories are being 

credited by Member States as a driving factor for the emergence of “borderline” 
products, particularly those seeking to take advantage of the lower levels of 
taxation of cigars/cigarillos. 

  The current definitions of Art 4(1) lead to increasingly disputed classifications of 
certain tobacco products as cigars/cigarillos. The nature of the disputes pertain 
to both the risk that this category is being abused to circumvent the high excise 
duties imposed on cigarettes  as well as to issues resulting from the application 
of divergent criteria for customs and excise purposes. 

87 Ibid. 86 

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  Even though the size of the cigarillos market (of which ‘borderline’ products are 
a subset) is relatively small when compared to the total market of excisable 
tobacco products, the hypothetical budgetary implication of misclassification on 
some of the individual countries which have reported problems (e.g. LV; NL; DE; 
EL) may be significant. 

  The current treatment of raw tobacco has a direct and an indirect impact on the 
budgetary objectives of Member States. The direct impact refers to situations 
where economic operators sell raw tobacco directly to consumers, allowing them 
to produce, on a small scale, tobacco products for their own consumption, 
avoiding the payment of the excise duty. The indirect impact is more significant 
and refers to the situations described in Q2.3 by which raw tobacco is diverted 
from the “legal” supply chain and used in the large and medium scale production 
of excisable tobacco products outside the premises of an authorised warehouse 
keeper, hence away from the control mechanisms of Member States  

  There is evidence that raw tobacco, partially processed tobacco, dried leaves and 

other types of tobacco are being sold directly to consumers, however, in the 
absence of measures of monitoring and control, it is not possible to adequately 
quantify the resulting revenue impact. Despite the lack of mechanisms in place 
to adequately quantify the amounts of raw tobacco diverted into the illegal 
supply chain, the quantification of illicit trade, as included in the excise duty gap 
section of this report, includes “contraband” (i.e. fake) as well as non-duty-paid 
(NDP) products. Quantities of raw tobacco diverted from the legal circuit will 
serve as raw materials to the “contraband” part of illicit trade and are included in 
the calculation of the excise duty gap 

  The current definition of Art 5(1) (a) and specifically, the wording of “without 
further industrial processing”, appears not to be appropriate in light of giving 
sufficient legal clarity for the inclusion of a number of products which arguably 
can be smoked as smoking tobacco. 

  The current definition of Art 5(1) (a) enables Member States to apply excise 

duties on water-pipe tobacco, irrespective of whether it contains tobacco or not. 
However, the characteristics of this kind of tobacco product are significantly 
different than those of other types of tobacco which are usually found within this 
category, and as such a single rate structure is not always appropriate. 

  In the current definition of Art 5(1) (b) “put up for retail sale and which can be 
smoked”, the treatment of bulk tobacco refuse put up for sale is unclear. In 
order to remove this legal uncertainty it has been suggested to remove the 
wording “retail” from the definition. 

  As there is currently no method by which the inclusion level of expanded tobacco 
in a particular tobacco blend can be legally ascertained by customs laboratories, 
any differentiated treatment of fine-cut tobacco on the basis of whether it 
contains expanded tobacco or not would be technically impossible to impose in 
practice. 

With  the  exceptions  of  the  aspects  presented  above,  this  evaluation  concludes  that, 
overall,  the  Definitions  of  Art  2-5  Directive  2011/64/EU  have  proven  to  be  effective 
and  are  generally,  appropriate  for  enabling  adequate  (correct  categories  and  rates) 
collection of excise duties for the large majority of manufactured tobacco products 

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Q2.2  To  what  extent  are  the  definitions  of  taxable  products  in  Articles  2-5  of 
Directive  2011/64/EU  appropriate  to  enable  monitoring,  verification  and 
authentication,  and  identify  illicit  trade,  evasion  and  abuse  in  the  Internal 
Market? 
Question  2.2  examines  the  capacity  of  the  Member  States  to  utilize  the  existing 
definitions  of  Directive  2011/64/EU  in  order  to  perform  monitoring  of  trade/  logistics 
of  taxable  tobacco  products,  identify  illicit  trade,  evasion  and  abuse  in  the  Internal 
Market.  

It must be stressed that, the appropriateness of the definitions of taxable products in 
terms of the efficient and effective realisation of the monitoring and control functions 
has two distinct dimensions:  

  The first is substantive in nature and relates to the scope of applicability of 

excise duty legislation (i.e. whether a product can be considered an excisable 
tobacco product, as defined by Art 2-5 of Directive 2011/64/EU). This dimension 
explores, in particular, the non-inclusion of raw tobacco within the scope of 
excisable tobacco products. 

  The second dimension is process-related, and refers to the concrete means by 

which the authorities of Member States code, classify, treat and monitor 
products which fall under the scope defined by the European legislation. 

As the substantive aspect has been thoroughly discussed as part of Q2.1 and Q2.3, it 
will be treated in this section only from the perspective of the monitoring and control 
function. 

In  order  to  facilitate  reading  and  gradually  build  the  narrative  of  the  evaluation,  the 
section  will  present  the  procedural  aspect  and  its  impact  on  the  functioning  of  the 
system,  with  a  particular  focus  on  the  dual  treatment  of  tobacco  products  for  excise 
and customs purposes.  

Q2.2 (a) The  extent with which dual coding and classification of tobacco products for 
customs  or  excise  duties  purposes  affect  the  capacity  of  the  Member  States  to  fight 
against avoidance or fraud 

The process of classification in excise duty categories  
In  order  to  analyse  the  potential  implications  of  the  dual  treatment  of  tobacco 
products  for  customs  and  excise  purposes,  an  understanding  on  the  processes  of 
classification at Member States level is necessary. This aspect has been researched on 
the basis of the sample of case study countries. 

The classification of tobacco products in their respective excise categories is performed 
in various ways across Member States. Additionally, processes may vary according to 
whether the product is imported from a third country or manufactured in the Member 
State itself or another EU country. 

Importation from 3rd countries 
At  importation,  a  customs  declaration  has  to  be  done  for  each  consignment;  the 
importers will be asked to declare, on their own responsibility, the CN code and excise 
code  applicable,  if  customs  officials  are  involved,  classification  on  the  basis  of  CN 
codes and CNEN descriptions will be performed. In this situation, they will also be in a 
position  to  recommend  the  excise  duty  treatment  on  the  basis  of  nationally 
established  equivalence  tables,  implemented  as  administrative  guidelines,  hence  the 

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link between CN codes and excise duty categories may be important in this scenario. 
It is at this stage that laboratory testing may be implicated (only when necessary). 

Products manufactured in the EU 
There are two general approaches possible:  

The  first  approach  relies  mostly  on  self-regulation,  in  which  a  new  product  (product 
type, brand) does not automatically undergo classification with the tax administration 
and there is no systematic approach that allows the tax administration to identify new 
products or have a say in their classification as one or another excise tax category. 

These systems rely on reports, or other ad-hoc operations such as inspections to come 
across  products  which  would  potentially  raise  doubts  with  respect  to  their  correct 
classification.  If  such  doubts  are  raised,  the  products  would  be  re-classified  on  the 
basis  of  a  visual  inspection  or  sent  to  the  customs  laboratory  which  would  be  in 
position  to  make  recommendations  for  the  correct  CN  and  excise  duty  treatment. 
Economic operators would be allowed to appeal against the re-classification.  

The  second  type  of  system  involves  tax  administrations  (to  various  degrees)  in  the 
initial classification of products which are manufactured in the tax territory of the MS. 
This  process  often  takes  place  when  manufacturers  request  an  authorization  and  are 
obliged to declare their products. At the moment the request is received, information 
regarding  the  characteristics  of  the  product  has  to  be  provided.  The  custom 
classification is achieved first, followed by the excise tax treatment. 

A  particular  unique  case  is  that  of  Greece,  where  in  addition  to  a  CN  code  and  an  excise 
code, a unique  national tax code is necessary  for all  excisable tobacco products placed on 
the market in Greece, this code is unique not only on product level, but the same products 
released for consumption at different price levels will have to be given a distinct code. This 
process  entails  the  declaration  by  the  operator  of  a  description  of  the  product,  its  name, 
packaging and retail selling price. The operators are required to refrain from releasing the 
product for consumption for 15 days.  It is through  this process  that the Greek authorities 
inter alia have an opportunity to verify the compliance of the products marketed in Greece 
with the requirements of each excise category and identify potentially abusive products. 

It  is  clear  from  the  analysis  that,  despite  the  fact  that,  from  a  legal  perspective,  the 
treatment  of  tobacco  products  for  excise  purposes  is  not  bound  by  the  treatment  of 
the  product  for  customs  purposes,  due  to  the  various  processes  of  classification  and 
monitoring, and indirect link between the two exists de facto. 

To  what  extent  are  CN  codes  and  the  explanatory  notes  thereof  consistent 
with the definitions of tobacco products in Article 2-6 of the Directive? 

The answers to the survey to Member States revealed divergent opinions with respect 
to whether the definitions of Directive 2011/64/EU and the CN codes (and associated 
explanatory notes) are consistent with one another. 

Fourteen  Member  States  expressed  their  opinion  that  the  two  coding  systems  are 
largely consistent with each other. 

Nevertheless,  a  number  of  inconsistencies  and  problems  were  reported  by  the  other 
Member  States.  The  reported  inconsistencies  were  then  analysed  to  verify  whether 

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they  are  caused  by  a  unique  situation  or  whether  they  are  the  result  of  a  systemic 
problem. The latter category (and their real-life impact) is summarised below: 

Table 11 Reported inconsistencies of the CN codes with the Definitions of Directive 2011/64/EU 

Inconsistency 

Outcome 

Tobacco free water pipe tobacco, 
is not present in chapter 24 of the 
CN classification 

Cigars, cheroots, and cigarillos 
(CN 2402 10 00) is not consistent 
with definitions of Art 4(1) (a) 

Articles 3(b) and (c) of the 
Directive are not reproduced or 
adapted into the explanatory 
notes at CN codes 2402 20 10, 
2402 20 90 or 2402 90 00 
(cigarettes) 

Even though tax law may treat tobacco free water-pipe tobacco as 
excisable, the customs officials will often overlook this fact. Since 
the customs processes have the CN codes as their basis, products 
not falling under chapter 24 will not be subject to increased 
scrutiny and additional control. 

Cigars covered by an outer wrapper of natural tobacco (not 
including the tip) will have to be included in another category 
(most likely in 2402 20 90). However, since, for excise purposes 
the product can still be a cigar, this may result in errors and 
difficulties in using EMCS, as the technical specifications do not 
always allow the combination of 2402 20 90 with T300. 

It is unclear what CN codes will correspond to the definitions of Art 
3 (b) and (c)  

One possibility is that CN 2403 10 10 can be treated as T200 
under certain conditions; however, it is unclear whether other 
categories would also correspond. 

Fine cut tobacco (Art 5 (2)) has no 
equivalent in the CN codes  

CN 2403 10 10 can be treated, according to the particularities of 
the product as both smoking tobacco (T500) as well as fine-cut 
tobacco (T400) for excise purposes 

Article 4(2) is included in the 
explanatory notes (CN 2402 10 
00)  

The derogation that applies to Germany and Hungary is due to 
expire at 31/12/14, hence a potential inconsistency is due to take 
place after that date 

The subjective criteria of “normal 
consumer expectations” of Art 
4(1) is not reflected in the CN 
codes (CN 2402 10 00 

In essence, this inconsistency makes the subjective criteria even 
harder to apply from a practical point of view, as all ensuing 
disputes will eventually take the CN classification in account for 
delivering an opinion on the treatment of the product. 

Expanded tobacco falls under 
2403 99 90 

Article 5(1) can be linked to wider 
number of CN codes, not just one. 

As this category usually contains non-excisable products, treating 
expanded tobacco as excisable is made difficult, with potentially 
negative consequences for adequate monitoring, control and 
budgetary objectives 

Article 5(1) has been designed as a residual category in order to 
capture products which may otherwise escape taxation. Moreover, 
this category is used by Member States to enlarge the scope of the 
monitoring and control function to cover products which could be 
intended for smoking, without it being obvious from their CN 
classification. 

CN 2403 10 10 has been brought 
in line with Art 5(1) (b) to be 
limited to “retail” sale, but is now 
not in line with CN 2401 30 00   

CN 2401 30 00 excludes waste prepared for sale as smoking 
tobacco or chewing tobacco, assuming it would be suitable for CN 
2403 10 10. The treatment of waste prepared for sale as smoking 
tobacco in bulk will be unclear both from a tariff classification as 
well as from an excise perspective 

CN code 2402 90 00 can include a 
variety of products, not all of 
which finding direct equivalents in 
the Directive 

Depending on certain circumstances, this category may lead to 
excise classification as T200, T400 or T500, or even contain 
products which are not excisable. 

Member States have reported that a number of attempts to modify CN codes to more 
adequately reflect the reality of the products concerned were attempted in the context 
of  the  Customs  Code  Committee  (CCC).  The  attempts  in  question  however  were  not 

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finalised,  due  to  fears  that  they  may  cause  additional  inconsistencies  with  the 
Directive. 

With  respect to  the  fact  that  CN  code  2402  10  00 does  not  reflect the  “normal  consumer 
expectations” of Art 4(1), during the 106th and 119th meeting of the CCC, an amendment 
to the CNEN to subheading 2402 10 00 "Cigars, cheroots and cigarillos, containing tobacco" 
was  discussed  in  order  to  include  products  being  advertised  and  sold  as  cigarettes,  but 
taxed as cigarillos.  

Most  Member  States  felt  that  the  amendment  of  the  CNEN  should  be  done  taking  into 
account the current text of Directive 2011/64/EU and not go beyond that objective in order 
to avoid discrepancies between the CN and Directive 2011/64/EU. 

Regarding  the  classification  of  tobacco  refuse  presented  in  bulk  and  suited  for  smoking 
(119th  meeting  CCC).  A  round  of  the  table  indicated  that  the  majority  of  Member  States 
represented  abstained  from  giving  an  opinion  on  the  issue  as  this  was  not  in  line  with 
definitions of the tobacco Directive 2011/64/EU. 

Some  Member  States  pointed  out  that,  in  the  current  framework,  CN  codes  can  be 
amended in relatively short timeframes to eliminate inconsistencies with the Directive, 
but  amendments  to  the  Directive  were  only  possible  at  large  time  intervals  and 
following a much more difficult process.  

Even  though  it  was  not  specifically  asked  in  the  survey,  several  Member  States 
specifically  recommended  that  CN  codes88  would  be  better  suited  as  the  basis  for 
excise duty. 

The  customs  tariff  includes  the  CN  and  TARIC  (Art  20/1  CC).  The  tariff  consists  of  11 
positions. The first 6 positions are part of the HS, which is administered by the WCO. The 
following  2  positions  (7  and  8)  are  part  of  the  CN:  This  is  a  systematic  inventory  of  all 
goods  on  the  basis  of  the  HS  managed  by  the  EU  with  further  subdivisions  of  the  EU  for 
tariff  purposes  (common  customs  tariff).  The  following  2  positions  (9  and  10)  are  part  of 
the  TARIC,  which  governs  Community  measures  such  as  anti-dumping  regulations,  tariff 
suspensions  or  quotas.  This  part  is  managed  by  the  European  Commission  itself.  The  last 
point is purely national and affects the determination of sales and excise tax rates, but not 
the classification of the taxable goods. 

Regarding alcohol and mineral oil, the Directive exclusively links to the CN, however in the 
field of tobacco taxation there is no general link to the CN. 

On  the  other  hand,  a  substantial  number  of  Member  States  expressed  concerns  over 
the same possibility. The countries holding this view argued that use of CN codes for 
excise  duty  purposes  could  cause  difficulties  such  as  a  reduced  flexibility  for  Member 
States’ evaluation of products, and even increased potential for abuse (as reported to 
be occurring for some energy products). They also mentioned that the sovereignty of 
the Member States in taxing goods would be unduly impeded by the qualified majority 
requirement in the customs area as compared to the unanimity requirement in the tax 
area  (Art.  113  TFEU).  The  later  argument,  however,  appears  not  to  be  fully 
substantiated,  as  any  changes  of  the  objects  of  excise  taxation  have  to 
be decided unanimously, whether or not referencing the CN. 

88 N.b Customs tariff positions 7 and 8 

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One  Member  State  pointed  out  that  the  recent  attempts  to  regulate  tax  issues89 
through the area of customs and tariff legislation (e.g. the modification of the CNEN of 
cigars/cigarillos  and  tobacco  refuse  without  the  corresponding  change  in  the  text  of 
the Directive) have not had the effectiveness sought and cause a series of unintended 
consequences.  The  assessment  of  this  evaluation  is  that  reducing  legal  uncertainty 
was  not  achieved  in  these  particular  cases  due  to  the  fact  that  the  change  to  one 
system was not reflected in the other.   

In the opinion of another country in this category, dual coding, in fact, actually has a 
positive  impact  if  regarded  as  an  additional  “check”  against  negligent  conduct  by 
customs  officers  who  fail  to  identify  incorrect  or  fraudulent  customs  declarations.  An 
additional  layer  of  supervision  could  ensure  the  correct  excise  classification  of 
products,  in  accordance  with  the  purposes  and  objectives  of  the  Directive.  This 
scenario,  however,  is  possible  only  in  countries  where  a  “classification  procedure” 
takes place with the involvement of tax authorities.90 

How  does  the  dual  coding  of  tobacco  products  affect  the  operations  of 
Member States? 
In  the  context  of  the  evaluation,  significant  efforts  were  conducted  to  isolate  the 
impact  of  the  differentiated  treatment  of  tobacco  products  for  fiscal  and  customs 
purposes on the basis of differentiated definitions on the operations of Member States. 

As many as fourteen Member States responded to the survey that there is no (or no 
significant) impact deriving from the need to apply a dual classification system, while 
an  additional  three  mentioned  that,  although  they  imagine  the  potential  of  problems 
surfacing, they have had no experience in this respect. One Member State reportedly 
sorted  out  potential  inconsistencies  in  this  respect  by  signing  an  unambiguous 
agreement on dual categorizations of the product sold on the market with all economic 
operators operating in the country. 

Only  four  countries  reported  that  the  dual  coding  affected  their  operations  in  various 
ways:  the  most  cited  effect  being  the  emergence  of  legal  uncertainty  as  a  result  of 
inconsistencies. Other effects included increased administrative costs and decrease of 
the effectiveness of IT systems. 

On the basis of a thorough analysis of the potential impacts reported, this evaluation 
concludes  that  the  problems  reported  by  Member  States  (legal  uncertainty,  decrease 
of effectiveness of  IT systems, and increased  administrative tasks) are not attributed 
directly  to  the  dual  treatment  of  tobacco  products.  It  appears  that  the  inconsistent 
treatment  of  tobacco  products,  as  a  result  of  interpretable  definitions  has  a  stronger 
contribution  to  these  effects  than  the  dual  classification  itself.  The  existing  practical 
links  between  customs  and  excise  classification,  however,  tend  to  exacerbate  the 
problem,  reducing  the  possibilities  for  an  unambiguous  classification  for  certain 
tobacco  products,  in  particular  those  belonging  to  a  CN  code  with  contains  both 
excisable as well as non-excisable tobacco products. 

The impact of the dual coding practice on the capacity of Member States to adequately 
perform monitoring and logistics and find illicit trade is impacted only to the extent to 
which  it  contributes  to  the  inconsistent  treatment  of  certain  products  as  excisable  or 
non-excisable tobacco products.91  

89  I.e.  to  attempt  to  reduce  the  legal  uncertainty  with  respect  to  excise  tax  treatment  of  certain  tobacco 
products  
90 See section Q2.2 (a) 
91 See Q2.2(b) and Q2.2 (c) 

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Q2.2  (b)  To  what  extent  current  definition  rules  and  implementation  thereof  are 
detrimental to other rules and mechanisms in application at EU level? 

Integrability of the current classification system with existing IT technologies 
In this section we have chosen to briefly describe the most important elements on the 
impact of the Directive  on the functioning of the  EMCS, a detailed, description of the 
IT  systems  commonly  used  by  Tax  administrations  in  support  of  imposing  excise 
duties  can  be  found  in  Appendix  5  –  Question  1:  Background  Information,  and  more 
specifically, as a result of the answers to Q1.5.  

All  responding  tax  authorities  stated  that  EMCS  has  improved  their  operations  by 
reducing the risk of fraud and by making inspections more targeted. It also allowed for 
improving the efficiency with respect to the paper-based system. 

Member  States  appreciate  that  data  that  can  be  extracted  by  the  EMCS  allow  for 
having a real-time overview of the movements, create risk profiles, feed risk-analysis 
systems and perform data mining. 

The  direct  impact  of  the  EMCS  on  illicit  trade  from  third  countries  however,  is  not 
evident.  

With  respect  to  the  specific  impact  of  the  dual  classification  on  the  functioning  of  IT 
systems  (e.g.  the  EMCS)  Member  States  have  mentioned  that,  where  there  is  an 
inconsistency between the CN codes and the excise treatment of the Directive, errors 
might arise,92 but these errors stem from a shortcoming of the technical specifications 
(which  should  be  kept  up  to  date  and  reflect  the  evolving nature  of  the  market)  and 
not from the systemic failure of the excise system. 

The  proper  functioning  of  the  rules  on  administrative  cooperation  and 
exchange of information 
To a great extent, Member States regard administrative cooperation and exchange of 
information  as  one  of  the  most  important  tools  available  to  fight  against  tax  fraud in 
the scope of excisable products which, by nature, is a cross-border phenomenon.  

Indeed,  the  illegal  trade  of  tobacco  products  is  a  transnational  infringement,  and 
detections and seizures of illegal tobacco products in a Member State involves criminal 
activities carried out in another Member State and/or third countries. So, cooperation 
and exchange of information at EU and international level are essential to develop the 
abilities  of  Member  State  administrations  and  increase  efficient  performance  in  this 
field. 

Some  Member  States  pointed  out  that  most  of  the  detections,  seizures  and 
investigations carried out require the participation and coordination with other Member 
States. 

With respect to suggestions for improvement, Member States suggested the following 
areas: 

  To increase the systematic collection on the movements of raw tobacco 

  To have periodic exchange of information about movement of risk tobacco 

products such as tobacco leaves and raw tobacco 

92 E.g. when the combination between a correct CN classification and a correct excise duty classification is 
not allowed by the EMCS specifications. 

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  To improve the response times of Member States following specific requests for 

information  

With respect to the impact of the current definitions on the functioning of the system 
for  admin  cooperation,  the  majority  of  countries  (14)  do  not  think  that  the  current 
definitions create a problem. 

A  number  of  countries  however  raised  concerns  with  respect  to  situations  where 
definitions  are  not  harmonised  (raw  tobacco)  or  the  application  of  existing  ones  is 
inconsistent  (e.g.  the  treatment  of  a  particular  tobacco  as  excisable  in  one  Member 
State and non-excisable in another).  

One Member State expressed its opinion that, since the EU Directive 2011/64/EU does not 
define  raw  tobacco  as  an  excisable  good,  the  lack  of  common  definition  and  treatment  is 
damaging for the functioning of administrative cooperation and information exchange.  

Example:  A  Polish  economic  operator  dispatches  raw  tobacco  to  a  competitor  located  in  a 
different  EU  Member  State.  Authorities  responsible  for  the  inspection  of  the  Polish 
dispatcher  approach  the  EU  Member  State  of  the  economic  competitor  that  had  acquired 
raw  tobacco  in  order  to  verify  the  transaction,  meaning  the  acquisition  of  raw  tobacco  by 
the  economic  competitor.  The  administration  of  the  EU  Member  State  of  the  economic 
competitor  informs  the  Polish  administration  that  the  transaction  cannot  be  reviewed  in 
cooperation with the economic competitor since  the delivered  good is not excisable on the 
territory of that EU Member State. 

In  this  respect,  Member  States  mentioned  that  clarifications  of  what  products  should 
be considered excisable or non-excisable would be welcome. 

Furthermore, Member States argued that a major negative consequence of the lack of 
harmonized  definitions  at  EU  level  is  that  it  is  not  possible  to  use  administrative 
cooperation  of  the  Council  Regulation  (EU)  389/2012  for  products  not  monitored  via 
EMCS. 

With  respect  to  the  appropriateness  of  the  definitions  in  Directive  2011/64/EU  to 
ensure effective and efficient functioning of other mechanisms (such as the EMCS and 
administrative cooperation and information exchange), this evaluation has found that 
the inconsistent treatment of certain tobacco products93 and the lack of a harmonised 
definition  for  raw  tobacco  negatively  influence  administrative  cooperation  between 
Member States.   

Q2.2 (c) The extent to which the non-inclusion of certain tobacco products within the 
framework of excisable tobacco products affects the monitoring and control function? 

The impact on the costs for tobacco growers, processors and other economic operators 
involved in the logistics of raw tobacco as well as on the capacity of the EMCS systems 
to handle the increased data traffic would have to be investigated. 

In  addition to  raw  tobacco,  this  section  presents  the  potential  negative  effects  of  the 
lack of harmonised (unequivocal) definitions for other products in terms of the ability 
to monitor trade and logistics of excisable tobacco products resulting from inconsistent 
treatment. 

The  inconsistent  treatment  of  such  products  (and  others)  may,  additionally,  have  an 
impact  on  budgetary  revenues,  on  administrative  costs  for  Member  States  and 

93 See Q2.2 (c) 

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compliance  costs  for  economic  operators.  Such  impacts  are  discussed  at  length  in 
Q2.1; Q4.1 and Q4.2 respectively.   

Water-pipe tobacco containing tobacco – CN 2403 11 00 
The  evaluation  has  found  no  inconsistent  treatment  of  water-pipe  tobacco  containing 
tobacco  across  Member  States.  There  is  no  evidence  that  the  lack  of  specific 
definitions  in  the  Directive  for  water-pipe  tobacco  negatively  impacts  the  ability  of 
Member States to perform monitoring of trade/ logistics of taxable tobacco products. 

Water-pipe  tobacco  not  containing  tobacco  –  (not  in  chapter  24  of  the  CN 
classification) 
The  evaluation  has  found  evidence  of  potential  inconsistent  treatment  of  this  type  of 
product. The product is treated as excisable in some countries and as non-excisable in 
other countries. As a result of this inconsistency, monitoring in some situations (such 
as  cross  border  movements  under  the  EMCS  or  duty  paid  cross  border  movements) 
can theoretically be affected. However, as this kind of product is usually imported from 
third  countries  and  is  consumed  in  very  marginal  quantities,  this  evaluation  has  not 
found  any  concrete  evidence  of  water-pipe  tobacco  not  containing  tobacco  being 
moved within the EU without proper documentation.   

Homogenized (reconstructed tobacco) – CN 2403 91 00 
Evidence  of  inconsistent  treatment  with  respect  to  this  type  of  tobacco  has  been 
found.  Given  the  use  of  this  product  in  the  tobacco  blends  and  the  manufacturing  of 
excisable tobacco products, failing to transport this type of product under the cover of 
an  e-AD,  for  transports  originating  in  countries  which  deem  this  product  to  be  non-
excisable can have an impact in the ability of Member States to  monitor the logistics 
of excisable tobacco products.  

Tobacco refuse - CN 2401 30 00 or CN 2403 10 10 
Tobacco  refuse  (CN  code  2401  30  00)  requires  substantive  clarification:  if  tobacco 
waste  can  be  smoked  but  is  not  “put  up  for  retail  sale”,  it  would  in  effect  not  be 
considered  an  excisable  product  and  hence  will  not  be  monitored  within  the  EMCS. 
This would have consequences on the ability of MS to perform effective monitoring or 
control. 

Expanded tobacco – CN 2403 99 90  
According to existing classifications, the treatment of expanded tobacco, even when it 
is  ready  cut,  and  destined  for  the  rolling  of  cigarettes  would  be  unclear.94  Failing  to 
include this type of product as an excisable product when it has been cut or otherwise 
split  and  is  capable  of  being  smoked  has  a  negative  effect  on  the  monitoring  and 
control function. 

Bulk bland tobacco – CN 2403 19 90 
In certain special cases when national decisions need to be taken on the treatment of 
a  certain  product,  there  is  a  risk  that  different  Member  States  could  have  different 
interpretations  regarding  the  adequate  classification  and/or  excise  treatment,  leading 
to  inconsistent  application  of  the  rules  and  to  problems  regarding  the  functioning  of 
the EMCS. 

94 According to Commission Regulation (EEC) no 3311/86 of 29 October 1986 on the tariff classification of 
goods  falling  under  subheading  24.02  E  of  the  Common  customs  tariff,  expanded  tobacco  is  to  be 
considered to be not suitable for smoking without further industrial processing and goes further to describe 
a test, which determined whether or not tobacco has been expanded 

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This evaluation has found significant evidence95 to support the hypothesis that the lack 
of  a  harmonised  definition  of  raw  tobacco  as  an  excisable  tobacco  product,  and  the 
resulting effect of its lack of inclusion as a product under the monitoring  of the EMCS 
has a strong negative impact on the ability of Member States to monitor the logistics 
of excisable tobacco products. 

Some  Member  States  have  suggested,  within  the  context  of  this  evaluation,  that  in 
order  to  improve  the  collection  and  exchange  of  information  on  the  logistics  of  raw 
tobacco,  it  should  be  included  in  the  scope  of  excise  duty  legislation  as  an  excisable 
product with a zero duty rate. 

However,  a  thorough  analysis  of  the  current  treatment  of  raw  tobacco  across  the  EU 
(see  section  on  Q2.3)  indicates  that  the  implementation  of  such  a  system  will  imply 
significant  costs  for  some  Member  States,  especially  in  those  where  the  legislative 
framework and control measures would have to be designed from zero. 

Summary 

Our analysis of the extent to which the definitions of taxable products in Articles 2-5 of 
Directive  2011/64/EU  are  appropriate  to  enable  monitoring,  verification  and 
authentication,  and  identify  illicit  trade,  evasion  and  abuse  in  the  Internal  Market 
reaches the following conclusions: 

  All the responding tax authorities stated that EMCS has improved their 

operations by reducing the risk of fraud and by making inspections more 
targeted. It also allowed for improving the efficiency with respect to the paper-
based system.  

  Member States regard administrative cooperation and exchange of information 
as one of the most important tools available to fight against tax fraud in the 
scope of excisable products. 

  The non-inclusion (or inconsistent inclusion) of a number of tobacco raw 

materials, intermediaries or by-products within the scope of the EMCS and the 
administrative cooperation, negatively affect the capacity of Member States to 
monitor and control the logistics of excisable tobacco products and fight illicit 
fraud. 

  A major negative consequence of the lack of harmonized definitions is that it is 
not possible to use administrative cooperation of the Council Regulation (EU) 
389/2012 for products not monitored via EMCS. 

  The dual classification of tobacco products does not necessarily have a direct 

negative impact on the capacity of MS to perform effective monitoring. However, 
it exacerbates the legal uncertainty around the treatment of certain products 
whose classification as excisable products is contested. 

  The dual classification of products, may, in certain cases exacerbate the problem 

of legal uncertainty with respect to the excise treatment of certain tobacco 
products; this effect is mostly present with respect to products belonging to CN 
classifications which include both excisable as well as non-excisable tobacco 
products. In certain cases, it also regards products whose tariff classification 
(and accompanying explanatory notes) is inconsistent with the definitions of the 
Directive. 

Summing  up,  as  currently  formulated,  the  definitions  of  Art  2-5  of  Directive 
2011/64/EU are not fully appropriate for enabling effective and efficient monitoring of 
excisable tobacco products. 

95 See section Q2.3 for a detailed breakdown of arguments and evidence 

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Q2.3 How does the treatment of products not defined by the Directive impact 
the  ability  to  perform  monitoring  of  trade/  logistics  of  taxable  tobacco 
products? 
As the protection of budgetary objectives critically depends on the ability of Member 
States  to  monitor  and  control  the  production  and  sale  of  excisable  tobacco 
products, Question 2.3 looks closely at whether the non-inclusion of certain products 
within the scope of Directive 2011/64/EU has any negative effects. This section gives 
particular  importance  to  raw  tobacco  as  an  essential  link  in  the  tobacco  trade  and 
logistics system.  

The  evaluation  has  found  that  the  inconsistent  treatment  resulting  from  the  non-
inclusion  of  raw  tobacco  as  an  excisable  product  has  a  strong  negative  effect  on  the 
ability  of  Member  States  to  systematically  collect  data  on  the  raw  materials  used  in 
the making of excisable tobacco products, fight illicit trade and ensure the collection of 
tax revenue. 

The Fiscal Treatment of raw tobacco 

Raw  tobacco  is  not  covered  by  Directive  2011/64/EU  and  for  this  reason  there  is  no 
harmonised  definition  of  raw  tobacco  for  fiscal  purposes,  the  national  systems  for 
control  in  force  at  national  level  may  make  reference  to  either  established 
international definitions, (such as the CN codes) or may be constructed individually at 
national level.  

As  the  treatment  and  the  conditions  for  the  purchase  and  sale  of  raw  tobacco  are 
seemingly  subject  to  differentiated  rules  in  the  Member  States,  the  present  section 
also  briefly  summarises  the  current  national  measures  of  controlling  and  monitoring 
the flow of raw tobacco before analysing their effects. 

A mapping of the  applicable definitions of raw tobacco, as well as its fiscal treatment 
in the Member States, has been conducted in the context of this study. 

Out of 24 tax administrations that provided answers to the question in the survey, ten 
(FI, LT, HU, HR, NL, CY, PL, RO, LUX and IE) stated that there is a national definition 
of “raw tobacco” in place either for fiscal purposes (e.g. in the fiscal law) or for other 
purposes (e.g. tobacco law) but which is used for fiscal purposes too.  

14  of  the  24  tax  administrations  responded  that  there  is  no  explicit  definition  of  raw 
tobacco  in  their  national  legislation.  Meanwhile,  the  Common  Nomenclature  and  the 
related explanatory notes may be used to define raw tobacco, when required.  

From a legal point of view, the manner in which raw tobacco is defined, appears to be 
very  fragmented  across  the  EU:  the  different  definitions  and  fiscal  treatment,  as 
reported  by  the  tax  administrations  in  the  context  of  the  survey,  are  summarised  in 
Appendix 8 – Overview of national definitions and treatment of raw tobacco. 

Q2.3  (a)  The  extent  to  which  information  on  the  logistics  of  raw  tobacco  is  being 
generated in the context of the current systems? 

Within the current  arrangements,96 data on  raw tobacco  can be generated from three 
potential sources:  

96 At national as well as at EU or international level 

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(i)  Customs information on importation from third countries;  
In the context of the Customs Information System (CIS) information on the amounts 
of  raw  tobacco  imported  and  released  within  free  circulation  in  the  EU  can  be  made 
available 

This  happens,  for  example,  in  Malta,  where  whenever  raw  tobacco  is  received  at  customs 
(mainly coming from third countries) it is put in free circulation and the excise authority is 
informed. Daily updates on the stocks of raw tobacco in the customs warehouses are sent to 
excise administration. 

(ii)  Data on the amounts of raw tobacco acquired, used and disposed of by 

authorised warehouse keepers. 

Information  on  raw  tobacco  becomes  available  and  relevant  to  the  control  and 
monitoring  of  the  production  of  excisable  tobacco  products  at  the  level  of  authorised 
manufacturers  who  are  required  to  maintain  accounts  of  all  unmanufactured  tobacco 
received, used, disposed of or resulting in the manufacture of tobacco products.  

However,  this  type  of  information  can  only  be  used  in  the  control  of  established 
manufactures  who  already  function  within  the  legal  system.  Even  in  systems  which 
require  that  raw  tobacco  be  sold  only  to  registered  warehouse  keepers,  this  data 
collection system cannot account for  raw tobacco which has been previously diverted 
to the illicit market.  

(iii)  Data generated in the context of national measures for the control and 

monitoring of the logistics of raw tobacco 

As  detailed  in  Q1.3  and  Q2.3,  in  a  majority  of  Member  States,  there  are  no  specific 
licensing,  authorisations  or  other  obligations  imposed  on  operators  involved  in  the 
logistics of raw tobacco. However, in the countries that have enacted legislation, there 
are several measures which have been implemented for the purpose of controlling and 
monitoring the logistics of raw tobacco.  

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There are  significant variances  between the choices made by each  MS. Nevertheless, 
the systems usually entail the application of one or more of the following measures: 

  The registration of one or more of the following types of operators trading in 

raw tobacco: tobacco growers; first processors or importers (e.g. DK, HU, HR, 
NL, CY, RO, PL) 

  The obligation that raw tobacco may only be sold to or bought by registered 
first processors or authorised warehouse keepers (e.g. DK, HR, CY, RO, PL) 

  The obligations for importers of raw tobacco to declare the final destination and 

use of the amounts imported (e.g. UK) 

  The obligation that movements of raw tobacco are accompanied by a paper 

based commercial document, detailing the origin and destination of the goods 
transported and/or the name and authorisation number of the economic 
operators involved. (e.g. FI, NL, RO) 

  The obligation to keep records of tobacco raw material for all persons trading in 

raw tobacco (SK) 

  Obligation to declare the amounts produced and their destination (e.g. GR, BE) 

  Marking of raw tobacco with tax marking and wrapping it in closed boxes 

(PL) 

In  countries  where  a  system  is  in  place,  excise  duties  or  criminal  fines  may  be 
imposed for raw tobacco found to be in non-compliance with the obligations (e.g. IE, 
FI, RO, PL, NL, HU). 

With respect to this last point, the systems described above, while potentially able to 
generate some data on the logistics of raw tobacco, have not been designed with this 
purpose  in  mind  and  are  generally  unable  to  generate  real-time  data  in  electronic 
format; as such they are not suitable for use in risk assessments and the targeting of 
control measures in a cost-effective manner.  

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Q2.3 (b) To what extent do Member States systematically collect and use monitoring 
data on raw tobacco 

In Slovakia, the flows of the raw tobacco on the tax territory as well as imports from third 
countries  and  receipts  from  other  MS  are  monitored.  Persons  involved  in  the  logistics 
(growing,  drying,  fermenting,  receiving,  storing  and  dispatching)  of  raw  tobacco  must 
register at custom office. 

The  trader  is  then  required  to  keep  records  of  tobacco  raw  material  (received  or 
dispatched, irrespective of destination).  

The trader is also required, no later than two working days prior to any receipt or dispatch 
of such tobacco raw material to notify the customs office of:  

  identification data of the trader; 

  the quantity, brand name and the respective code of the combined nomenclature of 

tobacco raw material; 

  identification data of the supplier or purchaser of tobacco raw material; 

  identification data of a person to/from whom it sells/purchases tobacco raw 

material; 

  the place of delivery of tobacco raw material. 

In  Hungary,  the  importation,  storage  and  supply  of  cured  and  fermented  tobacco  is 
subject to prior registration and notification requirements 

Within the system, tobacco producers, fermentation facilities, importers, traders (tobacco 
supplier),  and  tax  warehouses  used  for  the  storage  and  warehousing  of  cured  and 
fermented tobacco are subject to registration requirements. 

Tobacco  importers  and  suppliers  shall  keep  accurate  trade  records,  and  shall  notify  all 
tobacco shipments to the customs authority broken down per consignments, at the latest 
by the time of the commencement of the given import and trade transaction. 

Notification  obligations  shall  be  satisfied  by  electronic  means  and  must  contain  the 
quantity of the tobacco, the starting point and the destination of the movement, the time 
of  the  departure  and  the  supposed  arrival,  the  name  of  the  consignee  and  the  plate 
number of the transport vehicle. 

Only  two  countries  (Slovakia  and  Hungary)  collect  systematic  data  on  raw  tobacco. 
Most  systems  described  in  section  2.3  (a)  are  not  designed  to  generate  real-time 
information, but rather to facilitate checks and permit the application of excise duty on 
raw tobacco suspect of being taken out of the “legal circuit”. 

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The  reasons  for  not  systematically  collecting  data  on  raw  tobacco  are  categorised 
below: 

  Raw tobacco not treated as an excisable product:  

The main reason cited by Member States for not systematically collecting data is that 
raw tobacco is not an excisable tobacco product; therefore no information concerning 
its  circulation  exists.  Several  countries  have  mentioned  that  even  though  some  data 
(on  importation,  growing,  etc.)  may  be  available,  as  a  non-excisable  product,  once 
import  formalities  are  achieved,  the  product  is  not  monitored  and  no  follow-up  is 
carried  out.  The  EMCS  is  not  helpful  in  the  case  of  raw  tobacco  as  it  does  not  fall 
within the products followed by the system. 

  No manufacturing or production facilities in the Member State:  

Some Member States have mentioned that as they do not have any manufacturing or 
production  facilities  on  their  territory,  they  do  not  find  it  necessary  to  collect  any 
systematic data on raw tobacco.  

  Too many variables to make a good connection between import of raw 

tobacco and the excisable tobacco product:  

Several Member States have also mentioned that in the current system, a number of 
variables  are  outside  of  their  control,  hence  effective  monitoring  is  not  possible. 
Despite  having  in  place  licensing  systems  of  operators  and  measures  of  control  of 
importation, raw tobacco released in free circulation in another Member States is very 
difficult  to  monitor,  hence  it  would  not  be  accurately  reflected  in  any  potential  data 
analysis. 

  Mechanisms in place are not suitable: 

Finally,  the  Member  States  argued  that,  even  though  they  have  systems  in  place  for 
controlling  the  logistics  of  raw  tobacco,  they  are  unsuitable  for  collecting  systematic, 
real-time data, as they have been designed as a tool to facilitate only verification and 
checks, and not real-time monitoring. Such is the case for most systems which require 
only registration, record keeping or paper-based accompanying documents and do not 
impose  any  information  obligations  on  operators  other  than  authorised  warehouse 
keepers. 

Whereas  the  majority  of  Member  States  do  not  keep  information  related  to  the 
production  and  importation  of  raw  tobacco,  some  Member  States  do  use  the 
information  on  raw  tobacco  to  some  extent.  For  example,  it  is  not  uncommon  for 
information  related  to  the  importation  and  trade  with  raw  tobacco  to  be  used  by  the 
investigating authorities to get indications on the illegal production of excisable goods. 

Q2.3  (c)  To  what  extent  do  Member  States  consider  that  the  current  measures  for 
controlling the logistics of raw tobacco impact their ability to monitor excisable tobacco 
products 

Member  State  opinions  seem  to  be  split  in  three  groups  as  to  whether  the  current 
(lack  of)  measures  impact  the  ability  of  the  tax  authorities  to  monitor  excisable 
tobacco products.  

(a) Satisfied with the current arrangements: nine Member States: (EE, BE, NL, LU, SI, 
CY, IE, MT and RO) find the current measures for controlling raw tobacco sufficient 
and  not  having  a  negative  impact  on  tax  authorities'  ability  to  monitor  excisable 
products. The reasons for this opinion can be categorised in the following clusters:  

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  Countries with no production of raw tobacco and no manufacturing of excisable 

products (e.g. EE and SI) 

  Countries largely satisfied with the amount of data collected by the national 

measures currently in place (e.g. CY, IE, MTand RO) 

(b) Not  fully  satisfied  with  the  current  arrangements:  seven  Member  States  (DK,  FI, 
ES,  PT,  CZ,  IT,  SE)  indicated  that  the  current  measures  were  not  fully  sufficient 
and  can  have  a  negative,  albeit  minor,  impact.  These  countries  considered  that 
there is room for improvement. The reasons cited for this balanced opinion were: 

  Low quantities of raw tobacco imported or grown (e.g. DK, FI, ES) 

  Based on assessments and available data, the apparent risk of raw tobacco 

being diverted to illegal production is low, but the risk of tobacco being sold to 
consumers exists (PT) 

  Despite national measures being in place allowing the monitoring of operators 

dealing with raw tobacco and taking action if suspicion of illicit behaviour exists, 
the scope and reach of information could be improved (CZ) 

  While recognising the potential benefits of having more data on raw tobacco, the 
benefits would have to be weighed against the costs of generating the required 
data on both economic operators as well as the administration. (IT) 

(c) Not  satisfied  with  the  current  measures:  Ten  Member  States  indicated  that  the 
current  measures  negatively  impact  their  ability  to  monitor  excisable  tobacco 
products;  countries  in  this  category  have  advocated  the  improvement  of  control 
and monitoring measures at EU level. The reasons cited for this positions were: 

  The most effective way of combatting illegal production would be through the 

improvement of information on the movement of raw materials for the 
production of tobacco goods, better information on the flow and movements of 
these materials would assist the activities of Member States to pursue and 
dismantle criminal organisations involved in the illicit production of tobacco 
products. (DE, LT, LV, SK, HU, AT, HR, UK) 

  As growers report an increasing number of thefts from fields and the drop in 
revenue is declining faster than the “quitting” rate, it looks probable that the 
increase of the size of the illicit market can be linked with the illegal production 
and/or sale of raw tobacco. (HU) 

  Information which currently exists on the movements of raw tobacco97 is 

insufficient for effective monitoring and conducting targeted checks. (DE, UK, 
PL) 

  The capacity to monitor excisable tobacco products (produced legally and 

illegally) would improve if raw tobacco would be included within the scope of the 
EMCS). (SK) 

  In the context of the single EU market, national measures would not be fully 

effective, in the absence of an EU wide system the monitoring of goods crossing 
borders would not be fully possible.  

  More clarity with respect to the treatment of raw tobacco would help with 

enforcing measures aimed at preventing the sale of raw tobacco to consumers 
(see answers to Q2.1). (EL) 

97 See answers to Q2.3 (a)  

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Member States advocating for stronger measures admit that any potential increase in 
the scope of data collected from operators will impose administrative and compliance 
costs,  hence  any  step  in  the  area  should  balance  the  legitimate  interests  of  both 
economic operators as well as the need to tackle illicit trade.  

Summary 

Our  analysis  of  the  extent  to  which  the  treatment  of  products  not  defined  by  the 
Directive  impacts  the  ability  to  perform  monitoring  of  trade/  logistics  of  taxable 
tobacco products suggests the following conclusions: 

  Only two countries (SK and HU) reported that they collect systematic, real-time 

data on the production, movement and overall logistics of raw tobacco. 

  Systematic, real-time data and information on the logistics of raw tobacco would 

increase the ability of Member States to fight illicit trade and increase their 
capacity to fight against criminal organizations involved in the illicit production of 
excisable tobacco products. 

  The current arrangements for regulating the movements and logistics of raw 

tobacco applicable at national, EU or international level are unable to generate 
systematic, real-time data in electronic format, as such they are not suitable for 
the use in risk assessments and the targeting of control measures in a cost-
effective manner. 

  The absence of systematic, real-time monitoring of raw tobacco across the EU 

has a strong negative impact on the ability of Member States to perform 
monitoring of the logistics of excisable tobacco products and fight against illicit 
production and trade. 

  Any systematic monitoring of raw tobacco across the EU is not possible in the 

absence of a unified definition of what constitutes raw tobacco for the purpose of 
attaining the objectives of excise duty legislation. 

Overall conclusions  

  With the exceptions of the aspects summarised in Q2.1, this evaluation 

concludes that, overall, the Definitions of Art 2-5 Directive 2011/64/EU have 
proven to be effective and are generally, appropriate for enabling adequate 
(correct categories and rates) collection of excise duties for the large majority of 
manufactured tobacco products. 

  As currently formulated, the Definitions of Art 2-5 of Directive 2011/64/EU are 

not appropriate in light of enabling effective and efficient monitoring of excisable 
tobacco products. 

  The absence of systematic, real-time monitoring of raw tobacco across the EU 

has a strong negative impact on the ability of Member States to perform 
monitoring of the logistics of excisable tobacco products and fight against illicit 
production and trade. 

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tobacco  products  ensure 

Question 3: To what extent  do  the  current  arrangements  for 
excise  duty  on 
the  proper 
functioning  of  the  Internal  Market  and  avoid  distortions  in 
competition? 
In this chapter we report our analysis of the economic impact of tobacco excise duties.  
This  work  is  based  on  information  and  data  gathered  from  various  sources,  including 
purchased data on the tobacco industries, responses to our surveys of Member States 
and economic operators and prior studies on tobacco excise duties and illicit trade. 

A key challenge that is common to all aspects of the analysis is that of identifying the 
specific  impact  of  Directive  2011/64/EU  (‘the  2011  Directive’)  given  that  relatively 
little  time  has  elapsed  since  transposition  of  the  Directive  and  data  are  typically 
published  with  a  lag.    This  means  that  only  one  year  of  post-Directive  data  are 
available  and  so  robustly  identifying  the  impact  of  the  Directive,  as  distinct  from 
general trends, is difficult.  Nonetheless, we describe the potential impact of the 2011 
Directive wherever possible. 

A  complete  descriptive  overview  of  the  current  arrangements  with  respect  to  the 
structure  of  the  excise  duties  can  be  found  in  Appendix  5  –  Question  1:  Background 
Information. 

Q3.1 To what extent do the current rules on MED (Minimum Excise Duty) allow 
for neutral conditions of competition and the proper functioning of the internal 
market (avoiding distortion of competition or trade)? 
Article 7 (4) of Directive 2011/64/EU provides that “where necessary, the excise duty 
on  cigarettes  may  include  a  minimum  tax  component,  provided  that  the  mixed 
structure of taxation and the band of the specific component of the excise duty as laid 
down in Article 8 is strictly respected.”  Article 8 (3) of the same Directive states that 
“until 31 December 2013, the specific component of the excise duty shall not be less 
than 5 % and shall not be more than 76.5%  of the amount of the total tax burden”.  
From 1 January 2014, these limits are set at 7.5% and 76.5% respectively. 

When applied, the MED serves as a minimum floor for the taxation of cigarettes. The 
illustration  below  shows  that  the  effect  of  imposing  an  MED98  would  be  to  raise  the 
minimum taxation on cheaper brands such that all the products lying on the left of X 
would  be  taxed  at  the  level  of  the  MED,  while  all  the  others  would  be  subject  to  the 
mixed tax structure featuring the specific and ad valorem components. 

98 Here the MED is assumed to be a specific component (i.e. a fixed amount per unit of the product). 

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Figure 17  Excise duty structure with the MED 

On  the  diagram  above,  there  is  no  difference  between  the  level  of  tax  for  cigarettes 
with  a  retail  price  below  X,  but  the  level  of  tax  paid  by  those  cigarettes  with  a  retail 
price  above  X  increases  in  line  with  the  price.    The  MED  therefore  separates  the 
structure of taxes in the cigarette market: 

low-cost cigarettes face a pure per-unit tax; and 

 
  higher cost cigarettes face a combination of a per-unit and percentage tax. 

Economic theory suggests that the impacts of these tax structures on the market may 
differ significantly, though both are distortionary.  These differences are illustrated in 
the figure below. 

Figure 18  Economic characteristics of tax structures 

According  to  our interviews  with  Member  States,  there  are  a  range  of interpretations 
of  the  MED.  For  example,  Denmark  considers  that  as  the  MED  replaces  both  the 
specific  and  ad  valorem  components  of  excise  duty  (for  those  cigarettes  where  it  is 

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binding)  and  was  calculated  as  a  fixed  amount,  it  should  be  regarded  as  a  specific 
component. In contrast, Slovakia does not consider the MED as a specific component, 
while  the  Netherlands  considers  that  the  MED  contains  both  an  ad  valorem  and  a 
specific  component,  based  on  the  WAP.  While  Finland  tends  to  regard  the  MED  as 
specific,  it  is  not  completely  clear  about  how  it  should  be  classified  even  following  a 
request for clarification to the Commission.  A more detailed description of these views 
is provided in the table below. 

Table 12  Interpretation of MED rules 

Country 

  Interpretation of MED 

Denmark 

As the MED replaced both the specific and ad valorem component and was calculated as a 
fixed amount, it is regarded as a specific component. However, it has never been Danish 
practice to calculate an MED and "specific duty" as a total. Nevertheless, the limits (5-
76.5%) were considered to be applicable to the MED.  

Germany and 
Malta 

Consider the MED to be a specific component of the excise duty structure. 

Slovakia 

Slovakia does not consider the MED to be a specific component 

Slovenia 

Finland 

Italy 

Netherlands 

According to national law the MED is equal to total excise duty, which is the taxation of 
cigarettes at the WAP. 

The categorization of the MED is not clear: Finland asked the Commission clarification to, 
but the issue remains unclear. They tend to regard it as specific. 

The excise system is considered to be divided into two: an “ordinary regime” whereby 
cigarettes are taxed according to an excise duty featuring two components [minimum plus 
specific]; and a “special regime” with the MED. The criteria applicable to the specific and 
ad-valorem component are not regarded as valid references for the MED. 

The MED is considered to contain an ad valorem and a specific component, based on the 
WAP. There is considered to be a similarity between the MED and the specific component: 
the former works as a specific component. If the retail selling price is below the WAP, the 
product is taxed at the MED. In this case the MED results in a fixed amount, just like the 
specific component. The calculation of the MED is said to be in accordance with the 
Directive. The present ad valorem rate for cigarettes is 2.36%. If this ad valorem rate 
were increased, the MED would also rise. So although the MED is a fixed amount for 
cigarettes with a price below the WAP, the MED is influenced by changes in the ad valorem 
rate. 

With respect to  setting the level of the MED and the actions taken by Member States 
to ensure compliance of the MED with the legislation, interviewees provided divergent 
responses: 

  One Member State stated that a structure of high ad valorem duties and a high 
MED is used to ensure that both cheap and expensive cigarettes pay a high 
excise tax. It considers that a rate structure of high specific and a low ad 
valorem would allow manufacturers of expensive cigarettes to have high profits. 
The Member State reported that a high MED helps reduce price competition, 
ensures more budget stability and helps increase the ability to produce forecasts 
because profits are kept low. 

  Another Member State stated that it uses the MED to decrease the price range of 

cigarettes. 

  Some countries apply a mathematical equation to calculate the MED which is 
usually linked to the total tax burden at the WAP (or MPPC). For example, 
following the introduction of Directive 2010/12/EC, the Italian tax administration 
decided that the MED should amount to 115 per cent of the tax burden 

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calculated at the MPPC.  However, the administrative court (TAR del Lazio) 
suspended the decision as being in breach of EU principles and so the level of 
the MED was brought back to 100 per cent. The decision of the administrative 
court has been appealed and handed over to the Consiglio di Stato which, in 
turn, passed it onto the European Court of Justice. 

  Some countries (Germany, Slovakia, Luxembourg, Spain and Cyprus) agree that 
when the MED is set at a level equal to/lower than the total excise applied at the 
WAP, the mixed structure requirement is certainly fulfilled. 

  Latvia thinks that the MED should be lower than “excise yield” at WAP. In 

Romania, at the price level where the MED becomes applicable (RON 10.6; EUR 
2.3), the specific excise corresponds to 55.83% of total tax burden. Ireland sets 
the MED at 100%of the excise duty charged at the WAP (EUR 275.62, which 
represents the current specific rate of excise of EUR 241.83 per 1,000 cigarettes, 
plus the ad valorem rate of 8.72% of the retail selling price, applied to a notional 
retail selling price of EUR7.75), however they think that it might be in principle 
higher even though they recognize that the Directive is not clear on this point.  

  Similarly, each year Cyprus calculates the total excise duty burden at the WAP 
(based on previous year’s data) and sets the MED to be equal to that amount. 
By means of calculations it is checked that the MED is compliant with the limits 
set by the directive. This is considered sufficient to claim that the mixed 
structure requirement is fulfilled. 

  Uncertainties arise when the MED is higher. Austria levies an MED equal to 

98%of total tobacco tax burden at WAP and considers this to be in line with the 
requirements. Some countries levy a MED higher than 100% of the excise duty 
at WAP but still consider to be compliant with the mixed structure requirement. 
In Portugal, the MED is obtained by applying a fixed percentage (104%) over 
the excise resulting from MPPC: this is deemed to be in compliance with the 
mixed structure requirement, because in the excise resulting from MPPC, the 
two components (specific and ad valorem) are present. In Poland, the MED 
equals 100% of excise paid at the WAP for cigarettes. The Netherlands, similarly 
to Italy, maintains that the mixed structure requirements are separate from the 
MED. 

  The Czech Republic and Germany claim that compliance with the mixed 

structure requirements is safeguarded even though the MED is higher than the 
excise duty at WAP. 

  Lithuania claims that since it reports to the Commission twice a year, its tax 

structure is fully compliant with the mixed structure requirements.  

  Other countries (Slovakia, Latvia, Czech Republic, and Greece) maintain that as 

long as at least part of the market is taxed with an ad valorem and specific 
component, the requirements are fulfilled. Representatives of the Greek tax 
administration reported that some economic operators claim that the application 
of the MED in Greece violates the mixed structure requirement, in that most of 
the market is subject to the MED. However, the Greek administration believes 
that there is no agreed threshold in the Directive to back the economic 
operators’ claim. 

  According to an informal reply by the Commission to Finland, it is not possible to 
provide advice of the percentage of cigarettes which can be taxed according to 
the MED. They interpreted it as follows: “As long as the most of the cigarettes 
are taxed according to a specific and an ad valorem tax component (in 2012 in 
Finland 53.1 per cent), the MED is not too high, the mixed structure requirement 

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is fulfilled”. Given this interpretation, each year Finland performs a test to verify 
that at least 50 per cent of the market is subject to a specific plus ad valorem 
tax.  

Moreover,  Finland  pointed  out  that  the  biggest  challenge  lies  with  the  calculation  of 
the  WAP:  when  a  major  tax/price  increase  occurs,  the  structure  would  not  be  in  line 
with  WAP  calculated  using  the  old  (pre  tax  increase)  prices.  The  bigger  the  tax 
increase, the more problematic is the WAP calculated from releases to consumption in 
the previous year. The directive should be  clearer in this regard (it is only mentioned 
very briefly in the end of Art 8(5)). This goes for both the MED and a specific tax.  

The  discussion  in  this  section  suggests  that  there  is  a  lack  of  clear  understanding  of 
the MED provisions amongst the tax authorities of several EU Member States. 

Quantitative analysis 

All  but  four  countries  (UK,  Denmark,99  Sweden  and  Germany)  apply  a  MED  as  of  1 
January 2014 with values ranging from €275.62 (per 1,000 items) in Ireland to €70.76 
in  Lithuania.  As  shown  in  Figure  19,  there  is  no  straightforward  relationship  between 
the  specific  component  and  the  MED  such  that,  for  instance,  countries  with  a  high 
specific  component  also  charge  a  high  MED.  Finland,  Italy  and  Belgium  are  such 
examples of countries with a low specific component and a relatively high MED. 

Figure 19 Excise duty structure: Specific component and MED 

The  DG  TAXUD  Tobacco  Excise  Duty  Tables  for  Manufactured  Tobacco  contain 
sufficient  information  with  which  to  explore  Member  States’  past  implementation  of 
the  MED  provisions  in  the  Directive.    In  particular,  the  data  provided  in  those  tables 
allow  for  the  calculation  of  the  MED  as  a  proportion  of  the  total  tax  burden  for 
cigarettes in those Member States for which an MED has been specified. 

99 Denmark did apply an MED until July 2013. 

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The  tables  provide  the  WAP  in  euros  per  1000  cigarettes  for  each  Member  State 100.  
While  the  total  tax  burden  is  not  included  as  a  monetary  value,  it  is  possible  to 
calculate  the  tax  that  would  apply  to  1000  cigarettes  priced  at  the  WAP.101    Using 
these figures, we calculated the MED as a percentage of the total tax burden, with the 
results shown in the table below. 

These  calculations  suggest  that  while  there  is  no  legal  upper  limit  to  the  level  of  the 
MED, the majority of Member States have set it at a level close to 76.5 per cent of the 
total tax burden, which is upper limit for the specific component of the excise duty. 

Table 13  MED as Percentage of Total Tax Burden 

MS  MED as % Total Tax Burden 

01/01/2012 

01/07/2012 

01/01/2013 

01/07/2013 

01/01/2014 

AT 

76.8% 

BE 

73.5% 

BG 

79.4% 

CY 

77.8% 

CZ 

79.7% 

DE 

NA 

DK 

72.7% 

EE 

EL 

78.0% 

77.7% 

ES 

78.7% 

FI 

80.4% 

FR 

79.6% 

HR 

- 

HU 

74.9% 

IE 

IT 

0.0% 

87.1% 

LT 

76.2% 

LU 

76.5% 

LV 

76.2% 

MT 

79.6% 

NL 

80.5% 

PL 

77.8% 

PT 

79.7% 

RO 

74.2% 

SE 

NA 

SI 

78.5% 

SK 

79.0% 

UK  NA 

76.6% 

73.2% 

79.4% 

76.3% 

79.7% 

NA 

75.2% 

78.0% 

77.7% 

77.4% 

80.4% 

79.6% 

- 

72.7% 

76.5% 

89.1% 

76.2% 

76.5% 

76.6% 

79.6% 

79.6% 

77.8% 

79.7% 

73.3% 

NA 

79.1% 

79.0% 

NA 

76.6% 

75.1% 

76.9% 

80.3% 

80.9% 

NA 

75.2% 

77.0% 

80.1% 

73.9% 

79.7% 

79.3% 

- 

75.6% 

76.8% 

83.9% 

76.2% 

78.0% 

76.6% 

79.6% 

80.1% 

77.9% 

79.6% 

73.6% 

NA 

74.0% 

80.3% 

NA 

76.5% 

75.0% 

76.9% 

80.3% 

80.9% 

NA 

NA 

77.0% 

80.1% 

79.3% 

74.1% 

78.8% 

77.4% 

72.5% 

75.5% 

83.9% 

75.8% 

76.8% 

73.4% 

82.1% 

79.3% 

77.9% 

79.6% 

73.6% 

NA 

78.5% 

78.1% 

NA 

76.5% 

78.4% 

76.6% 

77.4% 

80.9% 

NA 

NA 

76.3% 

80.1% 

75.6% 

79.7% 

79.4% 

72.4% 

69.7% 

75.7% 

83.9% 

75.8% 

76.8% 

75.2% 

82.1% 

79.3% 

78.0% 

80.0% 

69.1% 

NA 

77.4% 

78.1% 

NA 

100 Column 12 of DG TAXUD excise duty tables 
101  By  multiplying  the  “total  tax  (incl.  VAT)  as  %  WAP”  variable  in  column  8  by  the  WAP.    This  is  our 
preferred method by which the total tax burden can be consistently estimated using the DG TAXUD Excise 
Duty  tables  given  that  the  tables  themselves  contain  some  percentages  estimated  on  the  basis  of  TIRSP 
(e.g. column 6) and others based on the WAP (e.g. column 15).   

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To understand the extent to which the MED has affected cigarette sales in EU Member 
States, it is necessary to both review stakeholders’ perspectives on the matter and to 
assess market data before and after the 2011 Directive. 

To  understand  the  views  of  stakeholders  concerning  the  MED  rules,  we  included  a 
number  of  relevant  questions  in  our  semi-structured  interviews  with  economic 
operators and Member States.   

In some countries, such as Ireland and Romania, a very small proportion of cigarettes 
are  taxed  at  the  MED  because  the  combined  ad  valorem  and  specific  components  of 
duty result in a tax level that exceeds the MED for almost all cigarettes. Therefore, it 
can be said that the MED has very little impact on the retail price of cigarettes in those 
countries and so has relatively little impact on the cigarette markets of those Member 
States.  By contrast, a very significant proportion of cigarettes are taxed at the MED in 
countries  such  as  Portugal  and  the  Czech  Republic.    This  means  that  the  level  of  tax 
exceeds that which would apply in the absence of the MED and so, assuming that the 
difference in tax is passed through to consumers, the retail price of cigarettes taxed at 
the MED is higher than if the MED did not exist.  In such cases, the MED distorts  the 
cigarette  markets  of  some  Member  States  by  raising  the  price  of  relatively  low  price 
cigarettes while leaving the price of more expensive cigarettes unaffected.  

To  provide  further  evidence  on  the  relevance  of  the  MED,  we  asked  economic 
operators  to  report  the  extent  to  which  MED  rules  have  affected  sales  of  tobacco 
products.    The  figure  below  shows  that,  overall,  just  8%of  respondents  stated  that 
sales  of  their  products  had  not  been  affected  by  MED  rules  and  8%  stated  that  they 
did not know how their product sales had been affected. However, this average masks 
interesting differences between countries: 

  33%of respondents (two from six in each case) with operations in Denmark, 

Sweden and the United Kingdom stated that the MED had not affected sales in 
those countries; but 

  in half of all Member States, 100% of representatives stated that the MED had 

affected sales.  It is noteworthy that this group includes Romania where the tax 
authority has indicated that a negligible portion of the market is affected by the 
MED. This may possibly be explained by cross-border trade and excise duty 
shopping giving effect to a price transmission mechanism.   

This finding suggests that the MED has affected the proper functioning of the Internal 
Market.  In particular, the findings that the proportion of cigarettes taxed at the MED 
differs  between  countries,  combined  with  the  perceptions  of  economic  operators  that 
the  sales  impacts  of  the  MED  have  been  greater  in  some  countries  than  in  others, 
suggests that the MED  has affected relative prices in different Member States and so 
has had an adverse impact on the functioning of the Internal Market.  

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Figure 20  Have the sales of any of your products been affected by the national Minimum Excise Duty (MED) 
provisions?102 

Source:  Analysis of survey responses 

Given  that  the  MED’s  function  is  to  counterbalance  the  operation  of  the  ad  valorem 
component,  in  the  case  of  cheaper  cigarettes,  one  would  expect  that  the  impact  on 
sales would be greatest for economy brands of cigarettes. 

The  rationale  for  this  hypothesis  is  that  the  MED  raises  the  total  tax  burden  of  each 
cheap  cigarette  and,  assuming  that  tax  is  passed  through  to  consumers,  leads  to 
higher prices than would apply in the absence of the MED.  More expensive cigarettes 
are not affected by the MED and hence the tax burden of those products is determined 
by the country-specific ad valorem and specific elements alone.   

According to the economic operators surveyed as part of this study, the products most 
affected  by  the  MED  are  indeed  economy  varieties.    Indeed,  as  shown  in  the  figure 
below, only one country (Cyprus) mentioned premium products being affected by the 
MED  and  just  three  countries  (Belgium,  Greece,  and  Portugal)  claim  that  mid-price 
products  have  been  affected.    Such  a  finding  suggests  that  the  MED  has  affected 
neutral  conditions  of  competition  by  distorting  relative  prices  of  different  types  of 
cigarettes (in particular by closing the retail price gap between premium and economy 
brands). 

102 Figure 20 reports answers of economic operators. As reported in figure 19, four countries (UK, Denmark, 
Sweden and Germany) do not currently apply a MED. 

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Figure 21  Which types of products were most affected? 

Source:  Analysis of survey responses 

Based  on the above  findings, it is clear that economic operators consider the MED to 
have  affected  the  price  and  sales  of  economy  cigarettes  in  all  EU  Member  States, 
including those where an MED has not been in force (which may possibly be explained 
by  cross-border  trade  and  excise  duty  shopping  giving  effect  to  a  price  transmission 
mechanism). 

However,  the  above  analysis  does  not  provide  any  information  on  the  scale  of  the 
reported impact.  To assess the extent to which the MED may have affected the sales 
of  economy  cigarettes,  we  present  the  proportion  of  all  cigarette  sales  that  are 
accounted for by economy brands in the figure below.103 

103  The  definitions  of  ‘economy’,  mid-range  and  premium  brands  used  in  our  analysis  are  specified  by 
Euromonitor,    Euromonitor  states  that  there  are  no  uniform,  cross-country  price  bands  set  for  tobacco, 
largely  because  of  the  large  variations  in  unit  prices  of  cigarettes  makes  such  a  standardised  definition 
impossible.  Therefore, each country sets its own definitions, based on in-country store checks. The detailed 
country-level definitions are available in Euromonitor reports and are available to subscribers on its website. 

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Figure 22  Percentage of all cigarette sales accounted for by Economy brands 

Source:  Europe Economics’ analysis of Euromonitor data 

The chart shows that there was a significant drop in the proportion of economy sales 
in Estonia and Greece between 2011 and 2012.  This may indicate that the MED had a 
particularly  significant  impact  in  these  countries  following  the  implementation  of  the 
2011 Directive.  The MED as a percentage of the total tax burden was approximately 
78%  in  both  countries  during  2012  (see  Table  13);  this  is  relatively  high  albeit  not 
exceptionally so. 

It is interesting to note, however, that a decline in the proportion of all cigarette sales 
accounted for by economy brands commenced prior to the implementation of the 2011 
Directive in several countries.  For example, economy cigarettes became less popular 
in  Lithuania  and  Slovakia  each  year  between  2007  and  2012  while  sales  of  economy 
cigarettes peaked in Hungary in 2010 and declined thereafter. 

It  is  also  notable  that  in  other  countries,  the  proportion  of  sales  accounted  for  by 
economy brands has increased over time, including between 2011 and 2012.  Indeed, 
the  market  share  of  economy  cigarettes  in  Finland  trebled  between  2007  and  2012 
while  sales  in  Ireland  increased  sharply  between  2011  and  2012,  having  been 
relatively  flat  previously.    Across  the  EU  as  a  whole,  the  market  share  of  economy 
cigarettes increased slightly from 28.9 per cent in 2007 to 30.4 per cent in 2012. 

These observations suggest that while the MED is perceived to have adversely affected 
the  sales  of  cheaper  cigarettes,  it  is  by  no  means  the  only  influence  and  does  not 
appear to be the most important driver of sales.  Indeed, positive influences on sales 
of  economy  cigarettes  (e.g.  down-trading  from  more  expensive  cigarettes  due  to 

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declining real incomes in recent years) have outweighed the negative influence of the 
MED in some cases, and neutralised the effect in others. 

Nonetheless, sales of economy cigarettes may still be lower than in the absence of the 
MED:    the  market  share  of  economy  cigarettes  in  the  EU  may  have  increased  more 
significantly  in  the  absence  of  the  MED.    Such  a  hypothesis  is  supported  by  the 
findings of our survey but it is not possible to test it using market data on sales alone 
without relying on some critical assumptions.  In particular, it is necessary to make an 
assumption  concerning  the  price  elasticities  of  different  premium,  mid-range  and 
economy cigarettes, together with the typical retail price of those categories. 

With respect to price elasticities, we assume that the own-price elasticity of demand is 
-0.4 (i.e. the value around which the WHO observed clustering, see also the discussion 
at  Q2  above)104.    For  modelling  simplicity,  we  further  assume  that  there  would  be  no 
upwards  substitution  (i.e.  we  assume  that  a  rise  in  the  price  of  economy  cigarettes 
only  would  not  affect  demand  for  premium  cigarettes.    Finally,  we  assume  that  the 
cross-price elasticity between neighbouring categories (i.e. premium / mid-range and 
mid-range  /  economy)  exceeds  that  between  premium  and  economy  cigarettes.  
These elasticities are set to 0.2 and 0.1, respectively.  

Given these assumptions, we have assessed the impact of eliminating the MED in five 
EU  countries.105    Given  that  the  abolition  of  the  MED  can  affect  more  than  one  price 
category simultaneously, and given that cross-price elasticities rely on the assumption 
that the price of one category changes while all else remains equal, our analysis of the 
impact of abolishing the MED relies solely on  own-price  elasticities.   This approach is 
particularly appropriate given our assumption of no upwards substitution.  The results 
of this with respect to demand and excise duty revenue are shown in the tables below. 

Table 14  Demand impacts of abolishing the MED  

Portugal 

Ireland 

Sweden 

Bulgaria 

0.2 

0.0 

0.0 

0.0 

Italy 

0.0 

29.2 

85.8 

Change in demand:  premium 
(million sticks) 

Change in demand:  mid-price 
(million sticks) 

Change in demand:  economy 
(million sticks) 

Total change in demand 
(million sticks) 

1.8 

3.1 

0.0 

0.1 

0.1 

0.0 

0.0 

0.0 

0.0 

0.1 

0.1 

115.0 

5.1 

104  We  consider  that  this  elasticity  assumption  is  appropriate  because  our  analysis  explores  the  impact  of 
changing the manner in which excise duties are collected.  We do not examine significant increases in the 
retail  price  of  tobacco  products  and  so  we  consider  it  unlikely  that  the  changes  would  lead  consumers  to 
seek illicit products.   
105  Before  settling  on  this  approach,  we  had  considered  an  alternative  of  estimating  what  would  have 
happened if the 2011 Directive had not come into force, using 2011 data.  The weakness with that approach 
is that it would require an assumption that all observed subsequent tax changes would have been identical 
in  the  absence  of  the  MED.    We  do  not  consider  such  an  assumption  to  be  credible:    Member  States  are 
likely to have implemented an MED rather than changing one or more elements of the mixed structure.  

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Table 15  Revenue impacts of abolishing the MED 

Italy 

Portugal 

Ireland 

Sweden 

Bulgaria 

Change in total excise duty 
revenue:  premium (€m) 

0 

-2 

Change in total excise duty 
revenue:  mid-price (€m) 

Change in total excise duty 
revenue:  economy (€m) 

Total change in total excise 
duty revenue (€m) 

-321 

-17 

-801 

-26 

-1,122 

-45 

0 

0 

-1 

-1 

0 

0 

0 

0 

0 

0 

-0.4 

-0.4 

These  results  show  that  the  greatest  adverse  revenue  impact  of  abolishing  the  MED 
would occur in Italy while Ireland and Bulgaria would be little affected (Sweden does 
not  apply  an  MED).  Given  that  a  significant  proportion  of  cigarettes  are  taxed  at  the 
MED  in  Italy  while  very  few  are  taxed  at  this  level  in  Ireland,  these  results  are  not 
entirely surprising. However, they do illustrate the significant differences in the impact 
of the MED on excise duty revenues in the selected Member States. 

Given  that  member  states  would  presumably  seek  to  recoup  some  of  the  lost  excise 
duties that would result from the abolition of the MED, we then explored the potential 
impact  of  changing  the  structure  of  excise  duties  in  these  Member  States.    In 
particular, we assessed the impacts that would arise if each of the tax administrations 
were  to  both  abolish  the  MED  and  instead  raise  taxes  on  premium  cigarettes.    Our 
analysis  included  both  direct  effects  (via  own-price  elasticities)  and  indirect  effects 
(i.e. due to changes in the relative price of premium products and consequent down-
trading, assessed via cross-price elasticities). Two different options were explored:  a 
20 per cent increase in the level of the specific tax; and a 20 per cent increase in the 
level of the ad valorem tax.  

Revenue  results  for  the  former  of  these  are  presented  in  the  first  table  below  while 
results for the latter are presented in the second table. 

Table 16 Revenue impacts of abolishing the MED and raising the specific duty on premium by 20 per cent 

Change in total excise duty 
revenue:  premium (€m) 

Change in total excise duty 
revenue:  mid-price (€m) 

Change in total excise duty 
revenue:  economy (€m) 

Total change in total excise 
duty revenue (€m) 

Italy 

71 

Portugal 

Ireland 

Sweden 

Bulgaria 

47.8 

103.4 

166.8 

38.2 

-321 

-17.0 

0.3 

-801 

-26.0 

-0.8 

0.1 

0.0 

0.3 

-0.3 

-1,052 

4.8 

103 

166.9 

38.2 

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Table 17  Revenue impacts of abolishing the MED and raising the ad valorem rate on premium by 20 per cent 

Change in total excise duty 
revenue:  premium (€m) 

Change in total excise duty 
revenue:  mid-price (€m) 

Change in total excise duty 
revenue:  economy (€m) 

Total change in total excise 
duty revenue (€m) 

Italy 

1009 

Portugal 

Ireland 

Sweden 

Bulgaria 

17.9 

18.9 

3.3 

22.5 

-318 

-17.2 

0.0 

-800 

-26.1 

-0.9 

0.0 

0.0 

0.2 

-0.3 

-109 

-25.4 

18.0 

3.3 

22.3 

These  results  show  rather  significant  differences  in  the  budgetary  implications  for 
Member States under the two options.  In particular, Italy currently has a low specific 
excise duty and so a rise of 20% for premium cigarettes has relatively little impact on 
its  revenue.    By  contrast,  the  specific  duty  in  Sweden  is  relatively  high  and  hence  a 
rise  in  that  duty  on  premium  cigarettes  would  have  a  substantial,  positive,  revenue 
impact.    Conversely,  raising  the  ad  valorem  rate  by  20%  would  have  a  significant 
impact  in  Italy  and  would  substantially  limit  the  loss  from  abolishing  the  MED  while 
this approach would have limited impact on revenues in Sweden.  

Summary 
Our  analysis  on  the  current  arrangements  of  the  MED  suggests  the  following  key 
findings: 

  given the various interpretations given by Member States with respect to the 

limitations of the MED, the nature of the MED and the applicable rules regarding 
its use do not seem to be clear, despite the Commission having answered a 
request for clarification; 

   

  the MED is considered to have affected only economy cigarettes and only in 

certain countries; 

As a result, there is some  evidence that the implementation of the  MED has affected 
neutral  conditions  of  competition  (by  distorting  relative  prices  of  different  types  of 
cigarettes)  and  the  proper  functioning  of  the  internal  market  (by  affecting  some 
countries  to  a  greater  extent  than  others);  however,  because  the  market  share  of 
economy  cigarettes  in  the  EU  has  increased  over  time,  it  appears  that  the  negative 
influence of the MED is offset by other factors.  

Q3.2 To what extent have changes in trade patterns been induced by changes 
in the tobacco excise duty levels? 
As  for  any  form  of  taxation,  excise  duty  differences  between  countries  may  create 
incentives for businesses and/or consumers to make certain choices or amend choices 
that  had  previously  been  made.    With  respect  to  trade,  differences  in  the  level  of 
tobacco  excise  duty  between  countries,  and  differences  in  the  rate  of  duty  changes 
between  countries,  can  provide  incentives  for  manufacturers  to  relocate  production 
and/or for consumers to engage in cross-border shopping. 

To  assess  the  extent  to  which  changes  in  trade  patterns  have  been  induced  by 
changes in the tobacco excise duty levels, we first examine changes in duty rates over 
time. As shown in the figure below, there was  a fairly consistent upward progression 

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in the level of tax on cigarettes between 2008 and 2013 in the majority of EU Member 
States. 

The  greatest  percentage  increase  in  tobacco  taxation  between  2008  and  2013 
occurred in Lithuania (87 per cent) and Bulgaria (91 per cent). By contrast, the level 
of tobacco taxation in Germany increased by only five per cent over the same period.  
Such  a  disparity  in  tax  changes  may  provide  incentives  for  tobacco  excise  duty 
shopping  (i.e.  the  purchase  of  tobacco  products  in  a  different  Member  State  to  take 
advantage  of the lower prices that are the result of lower  taxation) but the incentive 
would depend on the relative market price of cigarettes between countries (e.g. a 91 
per cent rise in excise duties in Bulgaria may still result in cheaper cigarettes than in 
Germany  even  if  the  rise  there  was  only  five  per  cent).    Where  excise  duty  changes 
amplify retail price differences between countries, excise duty changes would reinforce 
the  incentive  for  cross-border  shopping  that  arises  from  other  influence  on  tobacco 
retail price differences, such as differences in the cost of living between countries. 

Figure 23  Tax per cigarette (including VAT) 

Source:  Europe Economics’ analysis of DG TAXUD data 

Consumers are only concerned about tobacco excise duties to the extent that they are 
reflected  in  the  retail  price:  if  an  increase  in  excise  duty  was  fully  absorbed  by  the 
tobacco industry, i.e. leaving the retail price unchanged, there would be no reason to 
believe that consumers would change their behaviour.  Put simply, consumers respond 
to changes in retail prices, not changes in excise duties. 

Therefore, to understand the extent to which consumers respond to changes in excise 
duties  one  needs  to  assess  the  extent  to  which  changes  in  excise  duties  are  passed 
through  to  retail  prices.  Our  survey  of  economic  operators  found  that,  in  the  vast 
majority  of  cases,  their  view  is  that  increases  in  tax  are  fully  passed  through  to 
consumers. This would mean that any change in excise duties has a direct impact on 
the retail price of tobacco in the relevant country and hence has the potential to affect 

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trade  between  Member  States.  However,  it  is  worth  noting  that  some  economic 
operators  reported  that  costs  are  not  always  passed  through  immediately  but  rather 
are  absorbed  by  the  manufacturer  for  a  certain  period  of  time.  The  rationale  for  this 
decision would be to gain a short-term price advantage over competitors in the hope 
that  this  will  breed  brand  loyalty  in  the  longer  term.  Further,  manufacturers  can 
choose not to pass on 100 per cent of tax, making this choice for competitive reasons, 
rather than because of rules or regulations. 

The  chart  below  examines  the  extent  to  which  economic  operators  perceive  that 
consumers take advantage of differences in excise duties between EU Member States 
(this survey question specifically asked about the implications of differences in  excise 
duties  on  cross-border  shopping  as  compared  to  other  influences  on  cross-border 
shopping via the retail price). It is clear that economic operators believe differences in 
excise  duties  to  be  an  important  driver  of  cross-border  shopping  by  consumers. 
Indeed,  42  per  cent  of  respondents  reported  that  the  extent  of  excise  duty  shopping 
by consumers is very significant and 26 per cent reported a significant effect. Just 11 
per  cent  of  respondents  consider  that  the  extent  of  excise  duty  shopping  is  not  very 
significant  and  no  respondent  said  that  there  is  no  impact  of  excise  duties  on  cross-
border purchasing.106 

Figure 24  To what extent do the consumers take advantage of the differences in the level of excise duties 
throughout the EU (cross-border tobacco excise duty shopping)? 

Source:  Analysis of survey responses 

In  qualitative  responses  to  this  question,  most  respondents  agreed  that  different 
levels  of  excise  duties  have  led  to  an  increase  in  cross-border  shopping,  with  one 
respondent claiming that this affects 20 per cent of all tobacco consumption. There is 
recognition  that  this  is  not  only  the  case  with  tobacco  products,  but  that  consumers 
are  generally  price-conscious.  However,  stakeholders  informed  us  that  differences  in 
excise taxes do not affect cross-border shopping in cigars. 

106  In  order  to  correct for over-representativeness of certain  operators  which  have  answered  this  question 
multiple  times,  this  graph  depicts  the  views  of  operators,  taking  into  account  one  response  for  each 
economic grouping 

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There  is  also  a  perception  that  not  only  has  there  been  legal  cross-border  shopping, 
there has also been illegal cross-border trade, due to the excise tax levels in different 
countries. Such illegal trade may be: 

  smuggling (i.e. the illegal transportation of large consignments of tobacco 

products across borders); 

  bootlegging (i.e. the illegal transportation of small consignments of tobacco 

products across borders); and /or 

  counterfeiting / illegal manufacturing (i.e. production of cigarettes contrary to 

law). 

The  vast  majority  of  our  interviews  with  the  tax  authorities  of  Member  States 
confirmed  the  views  of  economic  operators,  reporting  that  differences  in  excise  duty 
levels  throughout  EU  prompt  cross-border  excise  duty  shopping,  which  may  be  both 
legal and illegal. 

However,  there  is  recognition  from  some  tax  authorities  that  the  implications  of 
changes in excise duties for  cross-border shopping depend very  much on geography. 
For  example,  countries  with  borders  that  are  external  borders  for  the  EU  experience 
high  levels  of  cross-border  shopping,  as  non-EU  countries  (e.g.  Turkey,  Belarus,  and 
Ukraine)  have  prices  below  EU  levels.  The  main  types  of  cross-border  shopping  here 
are illicit trade and smuggling.  

More generally, cross border shopping appears to be most significant in border regions 
and the scale of such activities depends, among other factors, on the magnitude of the 
retail  price  difference  (including  both  tax  and  non-tax  drivers  of  such  differences).  
Specific  instances  of  excise  duty  shopping  highlighted  in  our  interviews  with  tax 
administrations include: 

  consumers from PT going shopping to ES (because rates are lower in the latter); 

  from IT to SI (recent increases in prices reduced the price gap and the size of 

the problem); 

  from IE to most EU countries (especially smuggling); 

  from UK to BE (the UK has liaison officers in BE to cooperate with local 

authorities but cross-border shopping is considered to be difficult to curb as it is 
legal if goods are imported in limited quantities for personal use); and 

  from FR to IT; from DE and AT to CZ; and from CZ to PL. 

Despite the awareness of particular instances of cross-border excise duty shopping, in 
general very little data are available. Of those  respondents that were  able to provide 
quantitative  estimates,  one  administration  (Slovenia)  claims  that  cross-border 
shopping affects 15 per cent of the national market. Statistics compiled by the Italian 
administration showed that the consumption of cigarettes in regions close to Slovenia 
(e.g.  Friuli  Venezia  Giulia,  Veneto,  Trentino),  displayed  divergent  consumption 
patterns  from the national trend with a lower  per capita consumption based on sales 
of  tobacco  products  within  Italy.  This  is  likely  to  be  due  to  cross-border  shopping  by 
Italian  consumers  taking  advantage  of  the  lower  retail  prices  that  are  available  in 
Slovenia.   

While  the  existence  of  cross-border  excise  duty  shopping  is  clear,  approaches  to 
tackling  the  problem  are  not.  Indeed,  one  Member  State  claimed  that  until  a  fully-
fledged harmonization is reached (far in the future) nothing can be done: but for now 
the  choice  on  the  level  of  the  duties  is  a  national  matter.  Other  countries  were 

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somewhat  more  positive,  however,  and  suggested  options  such  as  target  controls  in 
border regions and, with respect to fighting against illicit trade from non-EU countries, 
increasing controls. 

In  contrast  to  the  impact  of  excise  duties  on  cross-border  purchasing  of  tobacco 
products,  the  figure  below  shows  that  differences  in  excise  duties  have  very  little 
impact  on  the  production  location  decisions  of  tobacco  manufacturers.107    Indeed,  82 
per cent of respondents to this question stated that they had not considered relocating 
tobacco  production  due  to  differences  in  excise  duties  in  the  EU.    12  per  cent  of 
respondents  stated  that  they  had  considered  relocation  but  it  is  not  clear  whether 
these considerations resulted in a final decision to relocate. 

Figure 25  Has your organisation ever considered relocating the production of tobacco due to differences in the 
level of excise duties throughout the EU? 

Source:  Analysis of survey responses 

In qualitative responses to this question, economic operators explained that the main 
reason for this is that the level of the excise duty is not dependent on the location of 
the  manufacturing  facilities.  Rather,  the  excise  duty  is  based  on  the  country  of 
consumption.  Other  reasons  for  not  moving  facilities  include  that  it  would  breach 
corporate  philosophy  with  some  manufacturers  having  a  long  standing  history  with  a 
particular location.    

However,  it  was  noted  that  to  maintain  a  manufacturing  site  anywhere  requires  a 
certain  local  demand.  If  nearly  all  manufactured  volume  has  to  be  shipped  to  other 
markets, there would be time and cost pressure on the supplier to move production to 
those markets of consumption. Due to excise increases and lower legal manufacturing 
volumes some countries may undermine their attractiveness as manufacturing location 
as  they  do  not  qualify  for  a  sufficient  volume.  However,  this  is  a  general  problem  of 
small countries and the level of excise does not add any significant risk. 

These findings were supported by the results of our interviews with the tax authorities 
of  Member  States.  Almost  all  respondents  stated  that  differences  in  excise  duties  do 
not have the potential to prompt relocation of business as by their very nature excise 
duties  become  chargeable  at  consumption:  products  can  be  moved  under  duty 

107  In  order  to  correct for over-representativeness of certain  operators  which  have  answered  this  question 
multiple  times,  this  graph  depicts  the  views  of  operators,  taking  into  account  one  response  for  each 
economic grouping 

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suspension.  While  certain  countries  pointed  out  that  they  know  of  /  received  threats 
from  manufacturers  of  relocating  following  an  increase  in  the  excise  duties,  they 
stated that these are considered to be empty threats.  

Nonetheless, some countries mentioned that the level of excise duties might be one of 
the  elements  inducing  relocation  but  it  would  have  nothing  more  than  a  minor 
influence.  More  important  drivers  of  relocation  decisions  include  the  cost  of  labour, 
quality of raw materials and general business conditions. 

Interestingly,  one  country  considers  that  production  decisions  may  be  influenced  by 
excise  duties  indirectly  as  an  increase  in  excise  duties  relative  to  those  that  apply  in 
neighbouring countries creates favourable conditions for the development of the illegal 
market and for the reduction of the legal market. This may lead to a reduction in the 
profitability of legal manufacturers and thereby raise a question on the preservation of 
a particular factory in a specific country. 

Legal cross-border trade 

The  above  analysis  has  demonstrated  that  stakeholders  perceive  cross-border 
shopping  by  consumers  to  be  significantly influenced  by  excise  duty  policies  but  that 
manufacturing  decisions  are  relatively  unaffected.  To  understand  how  excise  duty 
policies  can  affect  trade  in  a  bit  more  detail,  it  is  necessary  to  assess  the  incentives 
that exist for cross-border trade, and how these have changed over time. 

Our  approach  to  this  analysis  is  to  assess  the  extent  to  which  differences  in  retail 
selling prices between Member States outweigh differences in the cost of transporting 
goods between EU countries. This approach provides evidence on whether there exists 
an incentive for cross-border shopping (in addition to cases where the consumer is in 
another Member State for other reasons). A key assumption in our analysis is that the 
incentive  for  cross-border  shopping  is  proportional  to  the  difference  in  price  between 
countries, net of transportation costs.108   

To complete this analysis, two key pieces of data are required: 

  estimates of cross-border shipping costs; and  

  estimates of retail price differences between countries.   

The  table  below  presents  evidence  of  cross-border  shipping  costs,  as  reported  in  a 
study  completed  for  the  European  Commission.109  Given  this,  and  an  assumption  that 
the average number of cigarettes per kilogram lies in the range of 650 – 800, we also 
report  the  minimum  price  difference  between  countries  that  would  be  required  for 
there to be any incentive for cross-border purchasing.110 

We  note  that  under  Directive  2008/118/EC,  individuals  may  only  avoid  paying  excise 
duties  in  their  home  country  where  the  goods  are  acquired  and  transported  across 
borders  by  the  individual  himself  and  where  the  goods  are  for  his  own  personal 
consumption.    Ideally,  therefore,  we  would  have  data  on  the  cost  of  transporting 
goods  across  borders,  particularly  with  respect  to  specific  border  regions,  which  are 
the most likely to experience cross-border trade.   

108 Merriman et al (1995) made a similar assumption with respect to bootlegging 
109 FTI Consulting (2011), “Intra-Community cross-border parcel delivery” 
110 The minimum required price difference per cigarette is calculated using the following formula: Minimum 
price difference = cost 1kg parcel / number cigarettes per kg 

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In  the  absence  of  such  data,  we  must  instead  use  an  alternative  indicator  of 
transportation costs as a proxy for individual transport costs. While our approach does 
not  present  a  comprehensive  picture  of  incentives  for  trade  we  consider  that,  given 
the  data  available,  it  gives  an  indication  of  the  extent  to  which  tobacco  prices 
outweigh differences in transportation costs. 

Table 18 Transport costs (1kg package) and implied price differences 

Member State  The weighted average 
cross- 
border price of sending a 
1kg 
parcel (EUR) 

Required price difference 
per cigarette if 650 
cigarettes per kg  (EUR) 

Required price difference 
per cigarette if 800 
cigarettes per kg  (EUR) 

Austria 

Belgium 

Bulgaria 

Cyprus 

Czech 
Republic 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

Ireland 

Italy 

Latvia 

Lithuania 

13.24 

18.56 

11.93 

16.99 

17.38 

26.46 

9.83 

37.23 

12.94 

16.96 

23.32 

26.95 

20.97 

28.63 

13.94 

14.33 

Luxembourg 

16.01 

Malta 

9.12 

Netherlands 

15.35 

Poland 

Portugal 

Romania 

Slovakia 

Slovenia 

Spain 

Sweden 

UK 

10.80 

11.05 

7.67 

8.44 

10.26 

13.11 

23.62 

19.72 

0.020 

0.029 

0.018 

0.026 

0.027 

0.041 

0.015 

0.057 

0.020 

0.026 

0.036 

0.041 

0.032 

0.044 

0.021 

0.022 

0.025 

0.014 

0.024 

0.017 

0.017 

0.012 

0.013 

0.016 

0.020 

0.036 

0.030 

0.017 

0.023 

0.015 

0.021 

0.022 

0.033 

0.012 

0.047 

0.016 

0.021 

0.029 

0.034 

0.026 

0.036 

0.017 

0.018 

0.020 

0.011 

0.019 

0.013 

0.014 

0.010 

0.011 

0.013 

0.016 

0.030 

0.025 

Source:  FTI Consulting (2011) and Europe Economics’ calculations 

Based on a comparison of the table above and  Figure 23, it is clear that the required 
price  difference  for  there  to  be  an  incentive  for  cross-border  shopping  is  significantly 
less than the tax burden in all Member States.  This suggests that excise duties may 
conceivably affect consumers’ decisions of whether to purchase tobacco from another 

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Member  State  (e.g.  if  one  Member  State  were  to  halve  its  excise  duty  burden,  there 
would  be  an  incentive  for  consumers  from  many  other  Member  States  to  purchase 
from that country rather than in the domestic market). 

In economic theory, an individual that considers engaging in cross-border excise-duty 
shopping  will  probably  seek  to  secure  the  maximum  possible  saving  on  the  domestic 
price of cigarettes. Therefore, our analysis of the incentives for excise duty shopping is 
based  on  the  maximum  price  difference  between  Member  States,  as  reported  in  the 
table below.111 To assess changing incentives over time, we consider first the incentives 
in 2007, and then in 2012. This will help us understand how the incentives for cross-
border  trade  have  changed  over  time  and,  in  particular,  over  the  period  before  and 
after the MED was introduced for cigarettes in many Member States.  

Table 19  Incentives for excise-duty shopping in 2007 

Maximum price 
difference per cigarette 
in 2007 (EUR) 

Potential saving if 650 
cigarettes per kg, 
accounting for transport 
costs (EUR)? 

Potential saving if 800 
cigarettes per kg (EUR), 
accounting for 
transport costs (EUR)? 

MS 

Austria 

Belgium 

Bulgaria 

Cyprus 

0.113 

0.181 

0.021 

0.050 

Czech Republic 

0.056 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

Ireland 

Italy 

Latvia 

Lithuania 

Luxembourg 

Malta 

Netherlands 

Poland 

Portugal 

Romania 

Slovakia 

Slovenia 

Spain 

Sweden 

0.151 

0.014 

0.148 

0.190 

0.159 

0.075 

0.039 

0.293 

0.128 

0.001 

0.009 

0.167 

0.054 

0.132 

0.013 

0.094 

0.000 

0.051 

0.048 

0.066 

0.201 

 

 

? 

 

 

 

x  

 

 

 

 

x 

 

 

x 

x 

 

 

 

x 

 

x 

 

 

 

 

 

 

 

 

 

 

? 

 

 

 

 

 

 

 

x 

x 

 

 

 

? 

 

x 

 

 

 

 

111 The maximum price difference per cigarette is calculated by comparing 2007 retail prices in the country 
of interest with the retail prices in the same year in all other countries, as reported in Euromonitor data.  

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MS 

Maximum price 
difference per cigarette 
in 2007 (EUR) 

Potential saving if 650 
cigarettes per kg, 
accounting for transport 
costs (EUR)? 

Potential saving if 800 
cigarettes per kg (EUR), 
accounting for 
transport costs (EUR)? 

UK 

0.314 

 

 

Key:  x if above required saving; ? if within 0.005 of required saving;  otherwise. 

The results from the table above show that there was a clear incentive for excise-duty 
shopping  in  the  vast  majority  of  Member  States  in  2007  (i.e.  because  the  maximum 
price difference between EU countries exceeded the weighted average transport cost). 
The incentive was particularly strong in countries such as Sweden, the UK, France and 
Ireland due to the relatively high retail prices in those countries.  While excise duties 
provide  one  explanation  for  cross-border  shopping  by  consumers,  other  drivers  of 
retail  price  differences  are  equally  important.    Indeed,  excise  duties  only  affect  the 
incentive for cross-border shopping because of the impact on retail prices:  if changes 
in excise duties were not passed through to consumers, there would be no impact on 
the incentive for cross-border shopping. 

The  table  below  shows  the  incentives  for  excise  duty  shopping  in  2012.    Relative  to 
the  situation  in  2007,  there  exists  an  incentive  to  purchase  tobacco  from  another 
Member  State  in  slightly  fewer  countries.    The  incentive  for  cross-border  shopping 
remains  particularly  strong  in  Ireland,  the  UK,  France  and  Sweden.    However,  the 
incentive that existed in 2007 in Cyprus and Bulgaria was eliminated by 2012 due to a 
drop in the relative price of cigarettes in those countries.   

Table 20  Incentives for excise-duty shopping in 2012 

Maximum price 
difference in 2012 
(EUR) 

Potential saving if 650 
cigarettes per kg, 
accounting for transport 
costs (EUR)? 

Potential saving if 800 
cigarettes per kg, 
accounting for 
transport costs (EUR)? 

MS 

Austria 

Belgium 

Bulgaria 

Cyprus 

0.105 

0.141 

0.000 

0.013 

Czech Republic 

0.032 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

Ireland 

Italy 

Latvia 

Lithuania 

Luxembourg 

Malta 

Netherlands 

Poland 

0.119 

0.022 

0.117 

0.190 

0.130 

0.065 

0.017 

0.351 

0.117 

0.017 

0.010 

0.120 

0.068 

0.164 

0.007 

 

 

x  

x 

? 

 

  

 

 

 

 

x 

 

 

x 

x 

 

 

 

x 

103 

 

 

x  

x 

 

 

 

 

 

 

 

x  

 

 

? 

x 

 

 

 

x  

 
 
 
 
 
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

MS 

Portugal 

Romania 

Slovakia 

Slovenia 

Spain 

Sweden 

UK 

Maximum price 
difference in 2012 
(EUR) 

Potential saving if 650 
cigarettes per kg, 
accounting for transport 
costs (EUR)? 

Potential saving if 800 
cigarettes per kg, 
accounting for 
transport costs (EUR)? 

0.105 

0.019 

0.025 

0.043 

0.087 

0.161 

0.324 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key:  x if above required saving; ? if within 0.005 of required saving;  otherwise. 

The  erosion  of  an  incentive  for  cross-border  shopping  by  citizens  of  the  Cyprus  and 
Bulgaria  suggests  that  an  examination  of  changes  in  imports  to  these  countries  over 
time may provide an indication of the impact of excise duties on trade. 

The  figure  below  shows  the  total  volume  of  cigarette  imports  to  Bulgaria  between 
2007  and  2012  together  with  the  average  volume  of  imports  to  other  EU  countries.  
Data  for  Cyprus  were  not  available.    The  figure  shows  that  the  volume  of  imports  to 
Bulgaria  is  significantly  lower  than  the  average  of  other  EU  countries  and  remained 
broadly similar between 2007 and 2012 with the exception of a peak in 2009. 

Figure 26  Volume of cigarette imports   

The data presented in the figure above provide little evidence for the hypothesis that 
excise duties have a significant impact on trade in cigarettes. In particular, there is not 
a  consistent  downward  trend  in  imports  between  2007  and  2012,  which  would  be 
expected  if  the  incentive  to  engage  in  cross-border  had  fallen  and  cross-border 
shopping accounted for a substantial proportion of all cross-border trade. 

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Overall,  therefore,  it  appears  that  changes  in  excise  duties,  via  impacts  on  relative 
retail prices, are not one of the key determinants on cross-border trade (although they 
may have an important influence of cross-border shopping).   

Illicit trade 

Rather  than  engaging  in  legal  cross-border  trade  to  limit  exposure  to  taxation,  some 
parties may instead engage in illicit trade. Quantitative estimates of the total volume 
of illicit trade – and the associated excise duty loss – were presented in the discussion 
of Question 2.1. In this section, we provide more detail on the characteristics of illicit 
trade and the key factors that drive it, including excise duties. The discussion is based 
on  numerous  previous  studies  on  these  topics  and  responses  to  our  survey  of 
economic operators and interviews with Member States. 

Volume/value of the illicit trade in the EU 

Aside  from  the  analysis  presented  earlier  in  this  report,  a  number  of  studies  have 
sought to estimate the volume and/or value of illicit trade in the EU.  These include:  

  Joossens et al’s 2010 analysis reported that the illicit cigarette trade accounted 
for 11.6 per cent (or 657 billion cigarettes) of all cigarettes sold worldwide in 
2007;  

  KPMG’s project star reported that the volume of contraband and counterfeit 

(C&C) cigarettes was 56.8 billion in 2006, 60.6 billion in 2007, 60.5 billion in 
2008, 61.1 billion in 2009, 64.2 billion in 2010, 65.3 billion in 2011 and 65.5 
billion in 2012. This represents 8.3 per cent, 8.4 per cent, 8.6 per cent, 8.9 per 
cent, 9.9 per cent, 10.4 per cent and 11.1 per cent of total EU consumption 
respectively; 

  The consumption of ’illicit whites’ (i.e. cigarettes manufactured for the sole 
purpose of being smuggled into and sold illegally in another market)  had 
increased to 16 billion sticks in 2012 according to KPMG’s report. This means 
that they accounted for 24% of the total EU C&C cigarettes; 

  KPMG’s report also tracks the volume of C&C by Member State from 2006 to 

2012.  However, there are no data on the breakdown by counterfeiting, 
bootlegging and smuggling; 

  Merriman, Yurekli and Chaloupka used expert resources to estimate the share of 

smuggling as a percentage of 1995 domestic sales by Member States. 

Due  to  the  illegal  nature  of  such  trade,  data  obtained  and  published  are  limited  and 
often subject to bias. Even if one is completely neutral, limited data availability means 
that estimates are subject to a significant margin of error.  

Factors contributing to illicit trade 

Price 
Several  studies  have  confirmed  that  the  price  and  availability  in  a  market  of  cheap 
cigarettes  affect  the  level  of  illicit  trade.  In  general,  the  demand  for  cheaper  tobacco 
products  greatly  outweighs  the  availability  of  it  in  the  legal  market.  This  creates  a 
significant incentive for illicit tobacco products, which are usually 30 per cent to 50 per 
cent cheaper than their legal counterparts.  The low cost of manufacturing also makes 
supplying the illicit market profitable.  

In  addition  to  the  absolute  price,  the  relative  price  between  countries  can  also  affect 
the level of smuggling.  Norton’s  study found that the share  of bootlegged cigarettes 
increases  with  the  relative  price  of  cigarettes  and  decreases  with  local  enforcement 
activities. Baltagi and Levin’s study on the US market shows that a 10 per cent rise in 

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the  retail  price  in  a  neighbouring  state  led  to  an  increase  in  home  state  sales  of  0.8 
per  cent  (implying  a  cross  price  elasticity  of  demand  of  0.08).    The  “small  but 
significant”  cross  price  elasticity  implies  that  where  bootlegging  is  significant,  a  price 
change  in  one  state  could  affect  the  amount  of  illicit  sales  in  neighbouring  states. 
Another study using Canadian data shows that taxed consumption is more price elastic 
than  total  consumption  of  tobacco  (-1.01  vs  -0.4).    This  implies  that  price  has  more 
impact  on  where  people  buy  cigarette  (legally  or  illegally)  than  how  much  or  if  they 
buy it.  

The impact of a change in price on illicit trade may depend on the existing price level 
in  a  country.  Merriman’s  econometric  model  on  European  countries  found  that lowly-
priced  countries  (such  as  BG,  HU,  IT,  PL,  SK,  ES  and,  outside  the  EU,  Turkey)  are 
“relatively  immune  to  bootlegging”,  while  high-priced  countries  are  more  prone  to 
bootlegging.    

However, it is recognised that price is not the only factor that affects the level of illicit 
trade.  For instance, the Nordic countries have some of the highest cigarette prices in 
the world but a low level of smuggling. On the contrary, in Spain and Italy, prices are 
relatively  low  but  the  level  of  smuggling  is  high.      Merriman’s  econometric  model 
confirms  that  a  combination  of  low  cigarette  prices  and  other  factors  (e.g.  cultural 
factors  such  as  street  selling  being  more  acceptable  in  Spain  and  Italy  than  in  the 
Nordic countries) contribute towards high levels of illicit trade.   

Excise duties 
Almost all economic operators that responded on this topic agreed about the effect of 
the excise duties on illegal tobacco. Essentially, due to high and increasing taxes, the 
number  of  smuggled  or  counterfeit  cigarettes  has  increased  significantly.  Cigarettes 
are  generally  considered  to  be  the  most  affected  tobacco  product  due  to  the  high 
demand,  the  potential  for  high  profits  for  the  sellers  and  the  high  savings  for  the 
buyers.  However  fine-cut  tobacco  has  been  affected  most  significantly  in  France  and 
the  UK,  and  many  criminals  have  begun  to  manufacture  fine-cut  illegally  because  it 
requires less work to make than cigarettes. Finally, most people agree that cigars and 
cigarillos have the least potential for illegal activities, due to the fact that the demand 
is lower and manufacturing costs higher. 

One economic operator noted that Her Majesty’s Revenue and Customs of the UK has 
stated  that  two-thirds  of  consumers  of  illicit  products  buy  the  illicit  products  because 
they cannot afford expensive duty-paid products. The most affected product category 
is  cigarettes  as  they  are  generally  the  most  expensive,  dominate  tobacco  product 
demand and most convenient for the consumers. However, it was stated that as some 
Member  States  have  increased  fine-cut  tobacco  taxation  to  the  level  of  cigarette 
taxation  (or  above),  they  have  experienced  legal  market  reduction  by  up  to  70  per 
cent within a few months. 

Another respondent noted that, in general, tobacco excise tax increases are regressive 
and therefore have a greater impact on lower  income consumers than higher income 
smokers.  However,  despite  decades  of  tax  increases,  smoking  prevalence  (i.e.  the 
estimated  proportion  of  individuals  that  smoke  some  form  of  tobacco)  is  highest 
among  lower  and  middle  income  groups.  It  stated  that  studies  and  its  own 
observations show that low income groups are among the first to leave the legal tax-
paid  market  seeking  more  affordable  illegal  un-taxed  products.  For  example,  the 
respondent  stated  that  in  Bulgaria  the  economy  price  segment  has  been  fully 
substituted  by  illegal  cigarettes  while  the  economy  price  segment  has  been  highly 
impacted by illegal cigarettes in Romania. 

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Nonetheless, while high levels of smuggling have been associated with countries with 
high tobacco excise duties (e.g. the UK, Ireland and France) and despite the evidence 
put forward by respondents to our survey, the literature provides limited evidence that 
lowering tax would have a direct negative impact on smuggling.  

Several  studies  (Bhagwati  1974;  Simkin  1974;  Norton  1988)  find  that  smuggling 
increases  with  tax  and  tariff  levels.  In  particular,  Norton’s  econometric  model  shows 
that  for  current  smugglers,  the  optimal  amount  of  cigarettes  to  smuggle  increases 
with the tax rate. The number of firms that smuggle also increases with the tax rate. 
Hence, the overall level of smuggling increases with the tax rate.  

Cooper  and  Witt  cited  the  examples  of  Singapore,  Malaysia  and  Ireland,  all  of  which 
experienced  surges  in  illicit  trade  following  tax  hikes.    These  lend  support  to  the 
results of Norton’s econometric analysis. However, although illicit trade declined after 
Singapore  imposed  a  tax  freeze,  the  level  of  illicit  trade  remained  much  higher  than 
before  the  tax  hikes.    It  is  also  not  clear  if  the  decline  was  the  direct  result  of  tax 
freeze or due to other measures such as stricter law enforcement. 

Besides  the  level  of  tax,  the  speed  of  a  tax  increase  also  affects  the  amount  of  illicit 
trade.  The  G7  experience  has  shown  that  rapid  hikes  in  tobacco  duties  fuel  the 
increase  in  illicit  trade.  On  the  contrary,  countries  that  gradually  increase  tax  duties 
experience  little  change  in  the  amount  of  smuggling.  A  recent  illustration  of  this 
phenomenon  concerns  the  January  2014  increase  in  tobacco  excise  duty  in  France.  
The  total  tax  burden  per  1,000  cigarettes  rose  from  approximately  €247  to 
approximately  €264,  according  to  the  DG  TAXUD  Excise  duty  tables.    Indeed,  at  the 
time of this 7 per cent increase in excise duties, Euromonitor reports that “Illicit trade 
[has become an] … alternative solution to expensive cigarettes in France”.112    

Evidence also suggests that a collective tax raise, such as across the EU, leads to an 
increase in the consumption of illicit cigarettes. The literature suggests that as income 
levels  differ  greatly  among  EU  Member  States,  equalising  the  levels  of  excise  duty 
destabilises the market and consumers in some countries switch to the illegal market 
as a result.  

Although  there  is  a  strong  link  between  tax  level  and  illicit  trade,  the  fact  that  the 
aggregate level of smuggling is generally higher in countries with low taxes than those 
with high taxes, shows that excise duties cannot be the sole determinant of the level 
of  smuggling.  Other  factors  such  as  “the  ease  and  cost  of  operating  in  a  country, 
industry participation, how well organised crime networks are, the likelihood of being 
caught,  the  punishment  if  caught,  corruption  levels”  can  also  affect  the  level  of 
smuggling.   

Relationship between price and tax duties 
It is worth noting that although tax duties often account for a high percentage of retail 
cigarette prices, Cooper and Witt state that “there is no correlation between excise tax 
incidence  [i.e.  the  level  of  taxes]  and  the  retail  price  of  cigarettes”,  which  could 
potentially be explained by the application of VAT on top of the excise duty. Similarly, 
the  authors  state  there  is  no  correlation  between  the  level  of  excise  duty  and  the 
affordability of cigarettes. For instance, despite lower excise duties, cigarettes are less 
affordable in India and South Africa than in Canada and Italy, which have much higher 
excise duties.  Hence, Cooper and Witt concluded that one should not use exercise tax 
incidence as gauge in forming tobacco policies. 

112 Euromonitor (2014), “Tobacco in France” 

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Summary  
Our  analysis  of  the  extent  to  which  changes  in  trade  patterns  have  been  induced  by 
changes in the tobacco excise duty levels provides the following key findings: 

  changes in excise duties only affect trade patterns via the impact on retail prices 
– if excise duties were absorbed by manufacturers there would be no impact on 
trade; 

  duty changes are generally fully passed through to consumers and both 

economic operators and tax administrations believe that this has led to excise 
duty shopping by consumers and increased levels of illicit trade; 

  the incentive for excise duty shopping has changed somewhat over time but the 

impact on trade cannot be identified by economic data; 

  changes in excise duties have almost no impact on the choice of manufacturing 

location; 

  illicit trade is often more affected by abrupt changes in excise duty rates than by 
the actual level at which it is set. Illicit trade, once established, declines very 
slowly and is difficult to reduce. 

Q3.3 To what extent does the current structure and rates of the excise duties 
for  manufactured  tobacco  guarantee  the  proper  functioning  of  the  Internal 
Market?  
The core aim of this task is to understand the extent to which the rules introduced by 
the  2011  Directive  have  affected  the  tobacco  market  across  the  EU.    For  cigarettes, 
there are strong links between this issue and the analysis of the impacts of MED rules, 
while  the  above  analysis  of  trade  between  EU  Member  States  is  relevant  for  an 
assessment  of  the  functioning  of  the  internal  market  with  respect  to  all  types  of 
tobacco. 

Our analysis of this issue draws on both stakeholders’ perceptions and data gathered 
through desk-based research.  We first consider the general functioning of the tobacco 
markets  and  then  assess  the  issue  separately  for  cigarettes,  cigars,  cigarillos,  RYO 
tobacco and pipe tobacco. 

All tobacco 
The  chart  below  presents  the  total  value  of  tobacco  sales  in  each  EU  Member  State 
between  2007  and  2012.  The  Member  States  with  the  largest  tobacco  markets  are 
Germany, the UK, Italy, France and Spain.  

It  is  interesting  to  note  that  there  was  a  clear  decline  in  tobacco  sales  in  Spain 
between  2010  and  2012.  There  was  relatively  little  change  in  the  level  of  tobacco 
excise  duties  in  Spain  between  2010  and  2012  and  hence  the  decline  in  tobacco 
retailing  retail  appears  to  be  driven  by  other  factors.    For  example,  the  Spanish 
economy  has  experienced  a  particularly  strong  downturn  in  recent  years  and  a 
reduction  in  disposable  income  is  likely  to  have  a  direct  impact  on  tobacco 
consumption.  Some  consumers  may  switch  to  cheaper  alternatives  (e.g.  substituting 
cigarettes  with  RYO)  or  illicit  products,  while  others  may  stop  consuming  tobacco 
altogether.  Similar trends were observed in Portugal and Greece, both of which have 
experienced similarly poor economic conditions in recent years. 

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Figure 27  Total retail value of tobacco 

Source:  Europe Economics’ analysis of Euromonitor data 

While  the  influence  of  excise  duties  on  tobacco  retailing  is  not  immediately  evident 
from  the  figure  above,  it  is  important  to  understand  the  extent  to  which  the  current 
structure  of  excise  duties  allow  for  the  proper  functioning  of  the  Internal  Market, 
neutral  conditions  of  competition  and  the  free  formation  of  prices.    The  excise  duty 
system  should  not  have  an  unintentional  adverse  impact  on  these  issues  and  any 
finding of such an effect would be a cause for concern.  

Ensuring the proper functioning of the Internal Market 

According to the tax administrations of Denmark and Cyprus, the differences in excise 
duties  rates  across  Member  States  can  encourage  cross-border  shopping  and  the 
illegal trade of tobacco from low excise countries to high excise countries. Lithuania’s 
authority stressed that attention should be paid not only to the impact of the current 
excise  duty  structure  and  rates  on  the  proper  functioning  of  Internal Market  but  also 
to illegal imports from non-EU countries: ever growing excise duty rates within the EU 
would increase the risks of illegal imports from outside of the EU.  

It is generally considered that while idiosyncratic conditions in certain countries justify 
the  flexibility  left  to  national  administrations,  large  differences  in  the  structure  of 
excise duties and the applicable rates do not help to improve the proper functioning of 
the Internal Market. Indeed, the German authority thinks that the source of problems 
with  the  proper  functioning  of  the  Internal  Market  is  the  price  differences  between 
Member  States  (with  the  differences  in  excise  and  tax  treatment  being  one  cause  of 
such  differences).    Reducing  such  price  differences  would  decrease  the  share  of 
consumers purchasing tobacco products in other Member States due to lower prices.   

However,  despite  the  above  assertions,  it  is  not  clear  that  price  differences  actually 
place a constraint on trade between Member States and hence hinder the functioning 

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of the  Internal Market.  Indeed, economic theory shows that at least for the marginal 
consumer, price differences between countries should prompt trade. 

According to the Czech Republic, the structure and level of excise duties should allow 
neutral conditions of competition and free formation of prices.   However, it considers 
that  this  does  not  absolutely  ensure  the  proper  functioning  of  the  Internal  Market  as 
most  Member  States  apply  different  restrictive  measures  which  can  have  a  distortive 
impact on the whole EU market.        

Neutral conditions of competition 

In the interviews with the tax administrations of Member States it was stated by one 
Member  State  that  the  current  structure  of  excise  duties  had  led  to  a  strong 
concentration of prices, a high collusion of large players and a disappearance of cheap 
products  on  the  (legal)  market.  Interestingly,  this  is  seen  to  be  not  only  acceptable 
but actually as having a positive impact of the system. From an economic perspective, 
this  is  a  curious  statement  because  collusion  (either  legal  tacit  collusion  or  illegal 
active  collusion)  between  market  players  is  typically  considered  to  be  undesirable 
because  it  raises  prices  above  the  level  that  would  obtain  in  a  competitive  market.  
Indeed,  competition  policy  is  typically  designed  to  tackle  allegations  of  collusion 
through  remedies.  Therefore,  we  can  only  assume  that  the  feature  is  considered 
‘positive’ only because higher prices result in higher tax revenues.   . 

In contrast, another Member State informed us that it considers the current structure 
of  the  excise  duty  system  to  be  appropriate  as  it  guarantees  an  increase  of  retail 
prices  at  an  even  rate  for  all  price  levels  with  respect  to  cigarettes  and  smoking 
tobacco. Thus, tobacco products characterised by different price levels can effectively 
compete with each other in a given national market. 

The  chart  below  is  based  on  economic  operators’  responses  to  our  survey  and 
presents perceptions in respect of the extent to which the current structure and rates 
of excise duties allow for neutral conditions of competition. 

This  graph  shows  the  responses  of  economic  operators,  for  each  Member  State  they 
operate  in,  the  analysis,  by  Member  State,  ensures  that  over-representation  of  any 
particular  economic  operator  in  the  survey  answers  is  corrected.  The  data  contains 
one answer for each country in which respondents have reported to operate. 

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Figure 28  Does the current structure and rates of excise duties allow for neutral conditions of competition? 

Source:  Analysis of survey responses 

The  majority  of  respondents  in  all  Member  States  consider  that  the  current  structure 
does  not  distort  the  conditions  of  competition,  although  a  substantial  minority  of 
respondents in Portugal, Sweden and France disagreed. 

In  the  economic  operators’  qualitative  responses  to  this  question,  one  recurring 
comment was that all Member States are subject to the same general rules and hence 
in  that  sense  conditions  for  competition  are  neutral.  In  addition,  the  adoption  of 
prescriptive  EU-wide  structural  rules  would  most  likely  result  in  distortions  within 
individual  Member  States’  markets  for  various  tobacco  products  since  individual 
Member  States  would  no  longer  have  the  opportunity  to  apply  the  excise  structure 
that would best fit their specific circumstances. 

More  specifically,  one  economic  operator  noted  that  19  Member  States  have  reduced 
their  ad  valorem  excise  rates  since  January  2011  and  increased  the  share  of  specific 
excise.  By  allowing  the  greater  flexibility  to  determine  cigarette  excise  structure,  the 
current Directive is considered to have effectively brought it in line with the structure 
for  fine-cut  tobacco  intended  for  the  rolling  of  cigarettes.  It  was  noted  that  this  was 
the  intention  of  the  previous  Directive  review  along  with  the  objective  to  achieve 
simplification  and  transparency  of  the  excise  structure  on  tobacco  products.    It  was 
further noted that the current Directive provides freedom of structure for excise duty 
on  fine-cut  tobacco  and  other  smoking  tobacco  products  allowing  the Member  States 
to apply the excise structure that would best fit country’s specific circumstances.   

Overall,  the  economic  operator  stated  that  the  current  Directive  allows  an  optimal 
level  of  flexibility  to  determine  excise  structure  on  cigarettes,  fine  cut  smoking 
tobacco,  cigars  and  cigarillos,  smoking  tobacco  other  than  fine  cut.    Therefore,  the 
operator  considers  that  it  does  not  have  an  adverse  impact  on  neutral  conditions  of 
competition. 

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However,  a  small  number  of  respondents  argue  that  the  Directive  does  not  allow 
neutral conditions of competition.  For example, one respondent stated that while the 
structure  of  excise  duty,  as  described  in  Directive  2011/63/EU  allows  for  neutral 
conditions of competition, the application of the Directive by some Member States has 
a  harmful  impact  on  conditions  of  competition.    A  particular  problem  reported  by 
several  respondents  concerns  the  application  of  “excessive”  minimum  excise  tax  on 
cigarettes  or  an  “excessive”  level  of  taxation  on  tobacco  products  other  than 
cigarettes.      

More specifically, it was noted that the  Directive determines only minimum rates and 
so  Member  States  are  free  to  establish  any  excise  ratio  between  the  individual 
categories as long as the rates are above the minimum.   This flexibility is considered 
to  have  led  some  Member  States  to  apply  fine-cut  tobacco  excise  which  is  above 
cigarette taxation.  Given that cigarettes and fine-cut tobacco are in competition with 
each other to a greater extent than other types of tobacco products, it is argued that 
the  flexibility  has  removed  neutral  conditions  of  competition  for  fine-cut  tobacco  and 
for manufacturers  offering these products.   However, another respondent stated that 
the  current  Directive  provides  freedom  of  choice  of  the  structure  for  excise  duty  on 
fine-cut tobacco and other smoking tobacco products, which allows neutral conditions 
of competition and should be maintained.   

It was also suggested by one economic operator that the rules for minimum excise tax 
allow  for  subjective  interpretation  and  that  some  Member  States  apply  minima  that 
are not neutral in terms of competition and favour certain price segments and certain 
manufacturers.    For  example,  the  respondent  suggested  that  the  MED  covers  91  per 
cent  of  the  total  market  in  Portugal  and  stated  that  the  only  brands  above  the  MED 
are luxury niche brands and tourist brands; brands for local consumption are entirely 
covered by the MED. 

Free formation of prices 

Based on the survey of economic operators, the majority of respondents in all Member 
States consider that the current structure and rates of excise duties allow for the free 
formation of prices. However, when asked to elaborate, a few respondents stated that 
the free formation is limited by the excise duty structure.  

In particular, one respondent stated that the MED on cigarettes limits to an extent the 
free formation of prices.  Another respondent  stated that some Member States apply 
an  MED  and/or  ad  valorem  rate  which  has  a  significant  impact  on  price  levels.  The 
effect  on  the  free  formation  of  prices  is  qualified  by  the  fact  that  taxes  on  tobacco 
products  account  for  75  per  cent  to  85  per  cent  of  retail  price  for  the  weighted 
average price (and even more for less expensive brands). As a result, retail prices do 
not fully reflect the pre-tax differences.  

While  the  majority  of  economic  operators  consider  that  the  rules  allow  for  the  free 
formation of prices, there was less consistency in the opinions of tax administrations.  
For  example,  Denmark’s  considers  that  the  MED  on  cigarettes  limits  the  competition 
and the free formation of prices at least in the parts of the market that are covered by 
the  MED.    However,  the  Netherlands’  authority  states  that  companies  that  release 
cigarettes  or  other  smoking  products  for  consumption  are  free  to  decide  which  retail 
selling prices are applicable for their products, as long as they take the VAT and excise 
duty into account. 

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Market impacts 

While the excise duty system is not thought to have significant unintentional adverse 
impacts  on  the  nature  or  structure  of  competition  in  the  tobacco  market,  it  may 
nonetheless affect the total value of sales (since excise duties raise retail higher prices 
and this leads to lower demand) and the distribution of sales between different types 
of product (since consumers may respond to increases in the price of one product by 
substituting towards other products). 

The  chart  below  shows  how  increases  in  tobacco  excise  duties  are  perceived  by 
economic operators to affect tobacco sales. The answers were measured on a scale of 
one to seven, where one represented a very significant negative impact (drop in sales) 
and  a  seven  represented  a  very  significant  positive  impact  (increase  in  sales).    The 
general  consensus  among  respondents  was  that increases  in  excise  duties  negatively 
affect tobacco sales.  Indeed, 75 per cent of respondents selected option one or two.  

Figure 29  To what extent have increases in tobacco excise duty affected the sales of your tobacco products? 

Source:  Analysis of survey responses 

The  general  consensus  of  economic  operators  was  that,  as  a  result  of  increases  in 
excise  duties,  sales  of  cigarettes  have  decreased,  while  other  tobacco  products  may 
have  increased.    This  is  likely  to  be  the  result  of  down-trading  by  consumers  from 
cigarettes to products such as cigarillos or fine-cut tobacco as they seek to maintain or 
reduce their tobacco expenditure.  However, some respondents also stated that there 
has  been  substitution  from  the  legal  tobacco  market  to  the  illegal  one.  An  issue  that 
many  economic  operators  reported  is  that  cigars  and  cigarillos  are  in  the  same  tax 
category, even though they are different products. 

In  general,  the  respondents  mention  that  sales  typically  decrease  due  to  taxes,  but 
the  magnitude  varies.  Many  respondents  mentioned  that  as  the  price  elasticity  of 
demand  increases,  so  does  the  impact  of  a  tax  increase  on  sales.  More  specifically, 
one  respondent  noted  that  increases  in  price  (induced  by  excise  or  any  other  factor) 
always lead to a decrease in demand for any product and the magnitude of the impact 
is measured by the price elasticity of demand. However, the price elasticity varies over 

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time and in the tobacco sector it can be different for individual levels of price, or even 
for  individual  price  and  tobacco  product  categories.  Therefore,  it  was  acknowledged 
that  measuring  the  magnitude  is  not  easy  and  that  it  is  very  difficult  to  isolate  the 
excise impact from other measures such as anti-tobacco education.  

Nonetheless,  the  respondent  observed  that  increases  in  excise  duties  in  line  with 
inflation  normally  have  limited  or  no  impact  on  the  legal  market,  in  particular,  if  the 
retail price of tobacco remains relatively unchanged compared with net incomes. Given 
that  the  demand  for  cigarettes  is  relatively  price  inelastic,  such  a  statement  is  not 
surprising. Several other respondents stated that the impact of structure on the total 
cigarette sales is rather limited and/or that they are not aware of any case that excise 
increases had positive impact on sales. 

Other  respondents,  however,  considered  the  impact  of  excise  duties  to  be  greater.  
Indeed,  one  economic  operator  suggested  that  due  to  the  economic  crisis  and  the 
need  for  governments  to  generate  additional  tax  revenues  from  tobacco  products, 
there have been significant increases in excise tax sometimes combined with increase 
of  standard  VAT  rate.  Such  tax  increases  are  perceived  to  be  the  main  driver  of 
increases  in  retail  prices  and  as  such  they  are  a  key  cause  of  the  decline  in  sales. 
Another  respondent  noted  that  excise  increases  for  all  product  categories  normally 
result  in  losses  for  the  most  expensive  category  (cigarettes)  and  a  relatively  stable 
size for the lower priced categories, as the entering consumers are balanced by exiting 
consumers,  while  the  illicit  market  generally  grows  following  duty  increases.  An 
exception  to  this  rule  is  changes  in  the  MED,  which  affect  the  demand  for  economy 
cigarettes  and  thereby  are  unlikely  to  confer  any  adverse  impacts  on  relatively 
expensive cigarettes. 

Given that increases in excise duties can affect tobacco sales as a whole and lead to a 
pattern  of  substitution  between  products,  the  changes  may  also  affect  the 
competitiveness  of  firms.    In  response  to  the  survey  of  economic  operators,  several 
stated  that  their  competitiveness  does  not  depend  significantly  on  the  excise  tax 
structure because product portfolios can be readjusted and because all manufacturers 
face the same rules. In any case, several respondents stated that that the level of the 
tax, not the structure, is what affects competitiveness.    

However, one respondent stated that competition is affected in situations where prices 
across categories are converging due to excise. However, the direction of impact is not 
certain:  the  firm’s  competitiveness  can  be  affected  positively  as  well  as  negatively, 
depending on the product portfolio.  

Indeed,  the  impact  of  excise  duties  may  differ  depending  on  the  price  point  of  the 
product  (economy,  mid-range  or  premium).  The  figure  below  shows  how  the  current 
excise duty affects products at different price ranges. Responses were measured on a 
scale  of  one  to  seven,  with  one  representing  a  very  significant  relative  decrease  in 
sales and seven representing a very significant increase in sales.  

This figure shows that more than 50 per cent of respondents did not know how the tax 
structure affected the sales of economy, mid-range and premium products.  Of those 
that were able to provide a response, there is a perception that the current structure 
of excise duty has led to an increase in sales of cheaper products and to a decline in 
the sales of more expensive products.  Indeed, 28 per cent of respondents stated that 
there had been a very significant relative increase in sales of economy products while 
the same proportion reported that there had been a very significant relative decrease 
in sales of premium products. 

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Figure 30  How does the current structure of excise duty affect products at different price 
ranges?113

Source:  Analysis of survey responses 

Our analysis of the qualitative responses to this question shows that when looking at 
the  sales  of  different  brands  of  cigarettes,  economic  operators  tend  to  focus  on  the 
difference  between  ad  valorem  and  specific  taxes.  More  specifically,  the  respondents 
claim  that  specific  tax  systems  favour  premium  brands,  while  ad  valorem  systems 
favour economy brands. Another point is that any changes will be dependent upon the 
retail price gap between economy and premium brands.  

One economic operator stated that the high level of taxation on all tobacco products, 
and  cigarettes  in  particular,  reduces  affordability  which  in  turn  causes  consumers  to 
trade  down  from  high  taxed  cigarettes  (premium)  to  low  taxed  cigarettes  (economy) 
and  from  cigarettes  to  other  tobacco  products.  As  such,  premium  products  are  most 
affected  by  the  high  level  of  taxation  prevailing  in  EU  Member  States.  Moreover,  the 
negative impact of tax increases is considered to be exacerbated in countries with high 
total  ad  valorem  component  (excise  and  VAT)  as  the  multiplier  effect  of  the  ad 
valorem component further exacerbates price differentials, and thus down-trading. 

Another  respondent  noted  that  changes  in  the  relative  excise  difference  between 
products can affect products at different price ranges but the impact on sales depends 
on  the  excise  system  applied in  the  specific  country.  In  general,  excise  systems  that 
consist  primarily  of  an  ad  valorem  duty  seem  to  favour  economy  brands,  whereas 
excise systems, consisting primarily of specific duty seem to favour premium brands. 

It was also noted that price bands are generally smaller where the structure of excise 
duties is largely specific and larger where the structure is largely ad valorem, although 
this is limited through the use of a MED in the case of cigarettes.  

The  perception  that  the  excise  structure  can  have  a  significant  impact  on  sales  was 
not  held  universally  amongst  economic  operators,  however.    One  economic  operator 

113 This graph is based on responses done for each market in which economic operators who responded the 
questionnaire operate. 

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suggested that the duty structure has a very limited impact on the sales of brands at 
different  price  categories.    With  regards  to  cigarettes,  it  was  suggested  that  tax  and 
price  gaps  between  economy  and  premium  brands  are  generally  small  due  to  wide 
spread  use  of  MED.  Therefore,  the  respondent  considers  that  most  EU  markets  are 
compressed  from  tax  and  price  perspectives  and  so  the  influence  of  price 
segmentation on sales has declined as economy cigarettes are no longer cheap. 

Given  that  the  MED  in  the  case  of  cigarettes  is  perceived  to  have  adversely  affected 
sales of economy cigarettes, the finding that economic operators perceive the current 
structure  of  excise  duties  to  benefit  sales  of  economy  cigarettes  is  particularly 
interesting.    Indeed,  the  consistent  perception  that  the  negative  impact  of  excise 
duties  is  increasing  price  suggests  that  consumers  may  choose  cheaper  products 
rather than more expensive ones as a result of excise duties.  

To assess the relevance of this hypothesis, the graph below presents the perceptions 
of  economic  operators  with  respect  to  excise  duty  induced  substitution  within  the 
same  product  category  (e.g.  the  extent  to  which  consumers  switch  from  premium  to 
economy cigarettes because of taxes).  

Figure 31  What is the extent of excise duty tax induced substitution within the same product category?114 

Source:  Analysis of survey responses 

Overall, the responses provide evidence for the hypothesis that consumers substitute 
premium  brands  with  economy  brands  as  a  result  of  the  excise  duty  system  while 
there  is  very  little  evidence  for  the  reverse  effect.    Indeed,  respondents  for  Portugal 
and  Romania  were  the  only  two  countries  to  report  very  significant  substitution  of 
economy  brands  with  premium  brands.  The  Czech  Republic  reported  the  highest 
substitution of premium brands with economy brands at an estimated 50 per cent. 

Many economic operators argued that the structure of excise duties causes people to 
switch  from  premium  brands  to  economy  brand  tobacco  products,  via  the  impact  on 
the retail price. Others argued that it is not the structure of the directive that causes 

114  This  graph  is  based  on  responses  received  at  the  level  of  for  each  national  market  in  which  economic 
operators operate. 

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the substitution, but rather the level of the tax. Further, some respondents mentioned 
that  it  depends  on  the  behaviour  of  the  consumer.  For  example,  one  respondent 
wrote, “Someone who prefers to smoke a hand rolled premium cigar, will never smoke 
an  economy  brand  and  vice-versa.”  Others  mentioned  how  the  purchasing  power  of 
the  consumer  can  play  a  role  in  the  substitution  effect.  Finally,  many  respondents 
agreed  that  high  tax  rates  on  tobacco  products  lead  to  illicit  production  and  use,  as 
illicit prices are lower and more affordable to consumers. 

One respondent noted that changes in excise duty can lead to substitution within the 
same product category, other things being equal, but the substitution can go in both 
directions (i.e. to more as well as less expensive products) depending on the product 
category  and  the  excise  change.  The  extent  of  substitution  is  largely  determined  by 
retail  price  differences  but  excise  duty  taxes  may  allow  for  changes  in  price  gaps 
resulting  in  minor  movements  from  premium  brands  to  economy  brands  and  vice 
versa.  

Another  respondent  provided  information  on  the  patterns  of  substitution  by 
consumers.  In particular, it was noted that consumers typically trade down, i.e.: 

  premium to cheap cigarettes;  

  from cigarettes to less expensive other legal products; 

  from legal products to illicit products; and finally 

  from illicit products to the cheapest possible options such as unmanufactured 
tobacco, home grown tobacco or green tobacco plants and leaves stolen from 
farmers. 

These  developments  are  considered  to  have  taken  place  in  most  Member  States  and 
are most distinct in the new Member States where affordability is lowest.  

However,  while  the  findings  do  suggest  that  excise  duties  can  influence  product 
substitution,  it  is  not  possible  to  rule  out  alternative  explanations.    For  example, 
economic  theory  suggests  that  consumers  substitute  towards  cheaper  alternatives 
during  an  economic  downturn  resulting  in  an  erosion  of  real  incomes.    Indeed,  one 
economic  operator  noted  that  a  time  of  intensified  need  for  financial  restraint  by 
households, may result in more or less temporary fluctuations towards less expensive 
products.    Unfortunately,  it  is  not  possible  to  separate  the  influence  of  general 
economic  conditions  from  that  of  excise  duties  and  hence  excise  duties  may  provide 
only part of the explanation for patterns of substitution within a given type of tobacco 
product. 

In  addition  to  substituting  with  cheaper  alternatives  within  the  same  type  of  tobacco 
product,  it  is  possible  that  the  excise  duty  system  could lead  consumers  to  choose  a 
different  tobacco  product,  thereby  creating  excise  tax  induced  substitution  between 
product categories.   

The chart below presents stakeholders’ perceptions of the extent to which substitution 
between  tobacco  products  is  influenced  by  excise  duties.  There  is  some  evidence  of 
significant substitution of cigarettes with other types of tobacco although 18 per cent 
of  respondents  claim  excise  duties  have  no  impact  on  substitution  between  product 
categories.    There  is  limited  evidence  of  significant  substitution  of  other  types  of 
tobacco with cigarettes. 

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Figure 32  What is the extent of excise tax induced substitution between product categories?115 

Source:  Analysis of survey responses 

In  qualitative  responses  to  this  question,  many  economic  operators  agreed  that  tax 
and duty changes led to a decrease in cigarette consumption and an increase in sales 
of fine-cut tobacco used for RYO. However, it was equally noted that this is not due to 
the structure of the excise rates, but rather the Member States’ tax policies.  

It  was  stated  that  a  substitution  of  cigarettes  with  other  tobacco  products  generally 
occurs when significant excise tax discrepancy exists, and thus prices are significantly 
different (e.g. in comparison to fine-cut, cigarillos, other smoking tobacco).  A gradual 
closure  of  tax  gaps  between  cigarettes  and  other  tobacco  products  was  stated  to  be 
necessary to limit this phenomenon. 

However, some economic operators considered there to be limited excise tax induced 
substitution  between  product  categories  as  it  is  mainly  determined  by  consumer 
choice and purchasing power.  Indeed, it was noted by many respondents that duties 
are  not  the  only  driver  of  substitution  between  products.  Consumer  preferences  and 
purchasing  power  are  considered  to  play  important  roles,  as  are  factors  such  as 
unemployment and economic growth. A recurring theme in the respondents’ answers 
is  that  e-cigarettes  are  playing  an  increasingly  important  role  in  the  substitution 
between  categories:  it  was  stated  that  there  has  been  a  rise  in  e-cigarette 
consumption, in part because these items are not taxed. 

Overall,  the  above  analysis  has  found  that  the  current  structure  of  tobacco  excise 
duties  does  not  significantly  distort  the  nature  of  competition  within  the  tobacco 
market  and  does  not  constrain  the  free  formation  of  prices.    These  are  positive 
features of the excise duty system. 

115  This  graph  is  based  on  responses  received  at  the  level  of  for  each  national  market  in  which  economic 
operators operate. 

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However,  the  current  structure  of  the  excise  duty  system  is  perceived  to  have 
different impacts on different types of products.  In particular, it is perceived to have 
led  to  an increase  in  sales  of  cheaper  products  and  to  a  decline  in the  sales  of  more 
expensive  products.  This  pattern  appears  to  be  explained  by  substitution  towards 
economy  products.  There  is  also  a  perception  that  consumers  have  substituted  other 
types of tobacco for cigarettes as a result of the excise duty system. 

While  these  findings  provide  a  high-level  indication  of  the  economic  impacts  of  the 
excise  duty  system  on  the  tobacco  market,  a  full  understanding  of  the  impacts  can 
only  be  obtained  by  looking  into  each  product  in  more  detail.    This  analysis  is 
undertaken in the following sub-sections. 

Cigarettes 
The  chart  below  shows  that  the  total  value  of  cigarette  sales  declined  in  many  EU 
Member States between 2007 and 2012.  Across the EU as a whole, the total value of 
sales  declined  by  two  per  cent  between  2007  and  2012  but  this  average  masks 
significant differences between Member States.  For example, the total value of sales 
in Bulgaria fell by 45 per cent over the period whereas sales increased by 77 per cent 
in  Romania.    A  sharp  drop  in  sales  in  Spain  is  observed  after  2010,  which  almost 
certainly  reflects  the  sharp  economic  downturn  and  high  unemployment  experienced 
at that time.   

Figure 33  Value of cigarette sales 

Source:  Europe Economics’ analysis of Euromonitor data 

Average  cigarette  prices  rose  by  an  average  of  25  per  cent  across  the  EU  between 
2007 and 2012.  Indeed, as shown in the figure below, prices rose during the period in 
all  countries  other  than  Luxembourg  and  many  countries  experienced  a  monotonic 
increase  in  average  prices.    In  general,  prices  rose  more  sharply  over  the  period  in 
Eastern Europe than in Western, Northern and Southern Europe. 

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Figure 34  Average cigarette price 

Source:  Europe Economics’ analysis of Euromonitor data 

In  the  table  below,  we  compare  the  change  in  price  with  the  percentage  change  in 
sales for each Member State between 2007 and 2012. 

Table 21 Comparison of the change in price and in sales 

Country 

Austria 

Belgium 

Bulgaria 

Cyprus  

Czech Republic 

Germany 

Denmark 

Estonia 

Greece 

Spain 

Finland 

France 

Croatia 

Hungary 

Ireland 

Italy 

Lithuania 

Percentage change in price 

Percentage change in sales 

18% 

1% 

21% 

4% 

13% 

5% 

4% 

56% 

21% 

44% 

5% 

16% 

23% 

17% 

27% 

15% 

52% 

21% 

-3% 

-45% 

3% 

17% 

1% 

-4% 

29% 

-1% 

7% 

-4% 

-22% 

-14% 

-11% 

-2% 

-3% 

-13% 

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Country 

Percentage change in price 

Percentage change in sales 

Luxembourg  

Latvia 

Malta  

Netherlands 

Poland 

Portugal 

Romania 

Sweden 

Slovenia 

Slovakia 

United Kingdom 

-2% 

75% 

44% 

36% 

40% 

31% 

82% 

1% 

30% 

13% 

13% 

-7% 

22% 

14% 

2% 

-14% 

77% 

12% 

28% 

-19% 

2% 

-1% 

The table shows that there is relatively little apparent correlation between changes in 
prices and changes in sales (the correlation coefficient is 23 per cent).  For example, 
retail prices in Latvia rose by 75 per cent while sales grew by 22 per cent.  In contrast, 
prices  in  Luxembourg  fell  by  two  per  cent  but  sales  fell  by  seven  per  cent.    This 
implies  that  changes  in  the  value  of  cigarette  sales  are  explained  by  other  factors  in 
addition  to  price.    Given  that  changes  in  excise  duties  will  only  affect  consumption 
decisions  via  the  impact  on  retail  prices,  while  acknowledging  that  excise  duties  are 
not the only factor determining the prices, this analysis suggests that the influence of 
excise duties on cigarettes and (licit) sales volumes is weak. 

Indeed, the chart below shows how economic operators perceive the current structure 
of excise duty to affect the sales of cigarettes. Overall, 31 per cent believed that the 
tax  had  no  impact  on  cigarette  sales.  Cyprus  was  the  only  country  in  which  a 
respondent  reported  a  very  significant  relative  increase  in  sales  of  cigarettes  due  to 
the structure of excise duties. 

Overall, 28 per cent of respondents stated that there had been a significant decrease 
in cigarette sales due to the structure of tobacco excise duties (e.g. because they are 
taxed  at  a  greater  level  than  reasonably  similar  products  such  as  cigarillos)  but  this 
average  again  masks  differences  between  countries.    Indeed,  only  15  per  cent  of 
German respondents stated that there was a significant decrease in sales whereas 40 
per cent of respondents from Latvia and Lithuania reported a significant decrease.  

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Figure 35  How does the current structure of excise duty affect the sales of cigarettes? 116 

Source:  Analysis of survey responses 

Where tobacco excise duties are  perceived to  have had an impact on cigarette sales, 
the question arises  of  what actions were taken by  those  consumers  whose behaviour 
led to the reduced number of purchased cigarettes.  In principle, consumers may have 
stopped  purchasing  tobacco  altogether,  down-traded  to  a  cheaper  product  such  as 
fine-cut  tobacco,  engaged  in  licit  cross-border  trade  or  purchased  products  from  the 
illicit market. 

To understand the extent to which cigarette excise duties may affect the functioning of 
the internal market we present the average price per thousand cigarettes in the figure 
below.    The  figure  shows  that  there  were  some  substantial  retail  price  differences 
between neighbouring countries in 2012, particularly on borders between Western and 
Eastern  Member  States.  For  example,  the  price  of  1,000  cigarettes  is  approximately 
€100 lower in the Czech Republic than in Germany and hence there is an incentive for 
German  consumers  that  live  close  to  the  border  to  travel  to  the  Czech  Republic  in 
order  to  purchase  tobacco  products.  Of  this  €100  price  difference,  approximately  80 
per  cent  can  be  attributed  to  excise  duties  and  hence  the  excise  duty  system  does 
appear to have an influence on cross-border purchasing in this case. 

More generally, the figure below suggests that there was an incentive for cross-border 
trade between neighbouring countries in that year, particularly for consumers that live 
in border regions.  Any change in relative duty levels between neighbouring countries 
would,  given  that  excise  duty  changes  are  generally  passed  through  entirely  to 
consumers, affect the retail price difference and so may potentially affect the incentive 
on consumers to engage in cross-border trade.  However, it must be emphasised that 
the incentive is likely to apply primarily to consumers  who live in border regions and 
hence the overall scale of the impact is likely to be limited (and hence not observable 
in economic data).  

116  This  graph  is  based  on  responses  received  at  the  level  of  for  each  national  market  in  which  economic 
operators operate. 

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Figure 36  Price per thousand cigarettes, 2012 

In  this  context,  it  is  also  interesting  to  assess  the  relationship  between  the  WAP 
(which  serves  as  the  basis  for  excise  duty  rules)  and  retail  prices.  The  figure  below 
shows  the  difference  between  the  retail  price  and  WAP  per  1,000  cigarettes  in  2011 
and 2012 (the only years for which data on the WAP are available).  It is clear that in 
the majority of countries, the average retail price exceeds the WAP but the reverse is 
true in Cyprus and Malta, as well as for Denmark (albeit only for 2012). The difference 
was particularly large in Croatia and the UK. 

Nonetheless, the year-on year change within each country is relatively low and hence 
there is limited support for a hypothesis that the WAP is correlated with the prevailing 
retail  price  in  each  country,  notwithstanding  the  fact  that  the  absolute  gap  between 
the  two  variables  differs  significantly  between  countries.  In  fact,  the  correlation 
appears  to  be  far  from  perfect  given  that  we  observe  a  significant  year-on-year 
change in the gap in Ireland, the Netherlands and the UK. In addition, the persistence 
of  the  differences  between  2011  and  2012  may  reflect  systemic  differences  in  the 
calculation  methodologies  employed  by  DG  TAXUD  and  Euromonitor,  such  that  a 
closer correlation between the figures cannot be expected.  

Finally, it must be noted that we can only draw tentative conclusions at this stage.  A 
more  robust  analysis  of  the  correlation  between  the  WAP  and  retail  prices  requires 
more  than  two  years  of  data  and,  given  that  we  only  observe  the  WAP  from  2011 

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onwards, and that retail price data for 2013 are not yet available, such an analysis is 
not possible at this stage. 

Figure 37  Difference between retail price and WAP 

Source:   Europe Economics’ analysis of Euromonitor and DG TAXUD data 

Cigars 
The  graph  below  shows  the  total  value  of  cigar  sales  in  each  Member  State  between 
2007  and  2012.    The  countries  with  the  largest  cigar  markets  are  the  UK  and 
Germany, followed by Spain and Belgium. 

It is interesting to note that the UK had a very large cigar market in 2007, with total 
sales of approximately €800 million. However, the market has shrunk somewhat since 
2007, which may partly be explained by higher taxation on cigars. France experienced 
a similarly significant decline in cigar sales, particularly between 2010 and 2011. The 
reason  for  this  is  not  clear,  however:  there  was  no  change  in  excise  duties  between 
2010 and 2011 and no change in VAT applicable to cigars.  

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Figure 38  Value of cigar sales 

Source:  Europe Economics’ analysis of Euromonitor data 

As  illustrated  in  the  chart  below,  average  cigar  prices  differ  significantly  between  EU 
countries,  as  does  the  volatility  of  prices  between  2007  and  2012.  During  the  period 
considered,  average  cigar  prices  were  highest  in  Cyprus  and  Estonia,  while  Slovakia 
moved from having the third-highest price in 2007 to a broadly average price in 2012. 
Prices have been relatively volatile in each of these three countries. 

Overall,  there  has  been  relatively  little  change  over  time  in  average  cigar  prices 
although it is notable that many countries experienced a fall in average prices in 2008 
and / or 2009 followed by a subsequent rise.   

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Figure 39  Average cigar price 

Source:  Europe Economics’ analysis of Euromonitor data 

Based on these two graphs, there is not a clear correlation between changes in price 
and  the  total  value  of  cigar  sales.  In  the  majority  of  EU  countries,  the  value  of  sales 
either  remained  flat  or  underwent  a  monotonic  decline  between  2007  and  2012.  
Prices, by contrast, were generally more volatile over the period. 

This  suggests  that  the  changes  in  demand  for  cigars  may  be  explained  by  other 
factors,  such  as  the  poor  performance  of  the  economy  during  the  period.    Poor 
economic  performance  is  likely  to  have  led  to  a  decline  in  demand  for  cigars,  which 
are  a  premium  product:  as  the  real  value  of  consumers’  income  declines  during  a 
recession,  demand  for  luxury  goods  is  likely  to  fall.    Such  a  decline  may  be  partially 
reflected in an increased demand for other tobacco products, such as cigarillos, due to 
the substitution effect. 

The chart below shows how the current structure of tobacco excise duties is perceived 
by respondents to our survey of economic operators to affect sales of cigars/cigarillos 
in  different  Member  States.  More  than  50  per  cent  of  respondents  stated  that  there 
had  been  relatively  little  impact  on  sales,  although  the  minor  impact  that  has  been 
observed is considered to be positive.  

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Figure 40  How does the current structure of excise duty affect the sales of cigars/cigarillos? 

Source:  Analysis of survey responses 

As  for  the  case  of  cigarettes,  where  consumers  may  respond  to  changes  in  excise 
duties by amending their purchasing habit, they may have stopped purchasing tobacco 
altogether, down-traded to a cheaper product such as cigarettes or cigarillos, engaged 
in licit cross-border trade or engaged in the illicit market. 

To understand the extent to which cigar excise duties may affect the functioning of the 
internal market we present the average price per thousand cigars in the figure below. 

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Figure 41 Price per thousand cigars, 2012   

The pattern of cigar prices across Europe differs substantially from that of cigarettes.  
In particular, prices were generally lowest in western and southern Europe and there 
were  significantly  more  pronounced  price  differences  between  neighbouring  countries 
than was the case for cigarettes.  For example, each cigar purchased in Portugal was 
€5  more  expansive  than  in  Spain  and  hence  there  was  a  strong  incentive  for  cross-
border  trade.    However,  the  rates  of  excise  duty  were  reasonably  similar  between 
these  countries  and  hence  the  tobacco  excise  duty  system  does  not  appear  to  be  a 
particularly  significant  influence  on  cross-border  purchasing  of  cigars  within  the 
Internal Market. 

Cigarillos 
In  common  with  cigarettes,  total  sales  of  cigarillos  are  highest  in  Germany,  France, 
the  UK  and  Spain.  Total  sales  in  Germany  were  €900  million  in  2007  and  fell  to 
approximately  €550  million  in  2009.  After  2009,  the  consumption  of  cigarillos  in 
Germany starts to increase again and at the end of 2012, it is about €700 million. The 
increase in consumption of cigarillos in Spain offsets, to a minor extent, the decline in 
cigarette sales. 

More  generally,  the  figure  provides  some  evidence  for  our  above  hypothesis  that 
consumers have engaged in down-trading during the economic downturn.  While some 
of  the  trend  towards  substituting  cigarettes  with  cigarillos  might  be  explained  by 

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excise  duties  (in  particular  because  the  level  of  duty  on  cigarillos  is  typically  lower), 
the impact of declining real incomes cannot be ignored.  Indeed, it is natural to expect 
that  consumers  would  substitute  towards  cheaper  products  following  a  reduction  in 
their  disposable  income  and  so  it  is  not  possible  to  identify  the  extent  to  which  the 
pattern  observed  in  the  figure  below  is influenced  by  excise  duties  and  the  extent  to 
which it is influenced by other factors.  

Figure 42 Value of cigarillo sales  

Source:  Europe Economics’ analysis of Euromonitor data 

As shown in the chart below, there was relatively little change in the average price of 
cigarillos between 2007 and 2012 in most Member States.  However, very  significant 
price changes are observed in Lithuania and Latvia: 

  The average price in Lithuania started to decrease in 2007, reaching its lowest 

point in 2010. 

  The pattern in Latvia is similar to Lithuania—its price started to decrease at a 
low rate in 2007 and remained stable from 2008 to 2009. A sharp decrease 
occurs in 2009, when the average price dropped from €0.36 to €0.11. 

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Figure 43  Average price of cigarillos 

Source:  Europe Economics’ analysis of Euromonitor data 

Following  these  price  changes  over  time,  there  were  some  significant  differences  in 
retail  cigarillo  prices  between  countries,  as  illustrated  in  the  figure  below.  An 
interesting case study from the figure below concerns the Baltic countries as the retail 
price  of  cigarillos  was  significantly  greater  in  Estonia  than  it  was  in  Latvia  and 
Lithuania.  Some of the price differences can be explained by excise duties:  in 2012, 
Estonia  levied  a  specific  excise  duty  of  €192  per  1,000  cigarillos,  whereas  the  duties 
levied by Latvia and Lithuania  are less than  €40.  No ad valorem duties were applied 
and VAT rates were reasonably similar in all countries.   

This  suggests  that  excise  duties  are  an  important  influence  on  differences  in  retail 
prices  in  the  Baltic  Member  States,  though  by  no  means  the  only  driver  of  such 
differences.    Nonetheless,  the  analysis  suggests  that  excise  duties  on  cigarillos  are 
likely  to  have  played  a  role  in  cross-border  trade  in  the  Baltic  countries,  particularly 
with  respect  to  Estonian  consumers  crossing  the  border  to  purchase  products  from 
Latvia. 

However,  this  conclusion  does  not  hold  for  all  cases  in  which  there  are  substantial 
price differences between neighbouring countries.  For example, excise duty rates are 
reasonably  similar  in  Portugal  and  Spain  and  hence  other  factors  must  explain  price 
differences between these countries.  In such cases, therefore, the excise duty system 
does not appear to have a significant impact on cross-border trade in cigarillos. 

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Figure 44  Price per thousand cigarillos, 2012 

RYO Tobacco 
The graph below  shows that there was an increase in the total value of RYO tobacco 
sales  in  many  Member  States  between  2007  and  2012.  It  is  quite  possible  that  this 
reflects  the  economic  downturn  that  occurred  over  that  period,  and  a  pattern  of 
substitution away from relatively more expensive products, such as cigarettes, to the 
cheaper alternative of RYO tobacco. In common with other tobacco products, Germany 
has  the  largest  value  of  RYO  tobacco  sales.  The  Netherlands,  France,  the  UK  and 
Belgium also have large markets.  

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Figure 45  Value of RYO sales 

Source:  Europe Economics’ analysis of Euromonitor data 

The  figure  below  shows  that  the  average  price  of  RYO  tobacco  differs  significantly 
between countries. Nonetheless, prices in the majority of European countries lie within 
the  range  of  €50  to  €150  kilogram.  The  exceptions  to  this  rule  are  Sweden,  the  UK 
and Ireland, and to a smaller extent Romania and Cyprus: 

  The average price in Ireland fluctuates somewhat between 2007 and 2012. The 
price is decreasing in 2007-08 and 2009-10 while it is increasing in 2008-09, 
2010-11 and 2011-12.   

  The average price of RYO tobacco in both Sweden and the UK increased from 

2007 to 2012.  

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Figure 46  Average RYO price 

Source:  Europe Economics’ analysis of Euromonitor data 

A comparison of the two figures above indicates that the increase in demand for RYO 
tobacco  arose  primarily  as  a  result  of  changes  in  the  price  of  other  products  rather 
than changes in the price of RYO. 

Demand  increases  as  prices  fall,  and  vice  versa,  except  for  in  certain  special  cases 
such  as  Veblen  goods  (i.e.  the  demand  for  a  luxury  goods  may  rise  as  the  price 
increases).    In  the  case  of  RYO  tobacco,  however,  which  we  don’t  consider  to  be  a 
Veblen good, we observe an increase in demand at the same time as a rise in its price 
in many countries. There are two probable explanations for this phenomenon: 

  the prices of other tobacco products increased to a greater extent than did the price 
of RYO tobacco, thereby reducing the relative price of RYO and increasing demand; 
  the  real  income  of  European  consumers  fell  during  the  period  of  study  and  this 
would,  according  to  economic  theory,  encourage  consumers  to  substitute  towards 
cheaper alternatives. 

It  is  likely  that  both  of  these  possible  explanations  are  relevant.    We  can  test  this 
using data and evidence from previous research. 

Cullum  and  Pissarides  (2004)  suggest  that  the  cross-price  elasticity  between 
cigarettes and fine-cut tobacco is 0.38, indicating that a rise in the price of cigarettes 
by 10 per cent leads to an increase in demand for RYO tobacco of 3.8 per cent. 

Our data indicate that cigarette prices changed by between -2 per cent (Luxembourg) 
and  82  per  cent  (Romania)  between  2007  and  2012,  with  an  EU-wide  change  of  25 
per cent.  Given the estimated cross-price elasticity of 0.38 we would expect demand 
for  RYO  tobacco  to  rise  by  9.5  per  cent,  all  else  being  equal,  as  a  result  of  this 
substitution effect.  In fact, the expected impact would be slightly less than this given 
the increase in the price of RYO tobacco across the period. 

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In reality, the EU demand for RYO tobacco  measured in terms of volume, rose by 33 
per  cent  between  2007  and  2012.    This  clearly  indicates  that  substitution  from 
cigarettes  to  RYO  does  not  provide  the  full  story.    Substitution  from  other  tobacco 
products  to  RYO  is  likely  to  be  relevant,  as  is  the  impact  of  falling  real  incomes.  
Unfortunately,  we  cannot  test  these  hypotheses  due  to  a  lack  of  appropriate  cross-
elasticity estimates in the literature. 

The chart below shows how the current structure of tobacco excise duties is perceived 
by  economic  operators  to  affect  the  sales  of  fine-cut  tobacco.  There  is  generally 
considered to have been little impact:  almost half of the respondents said that there 
is no impact at all.  Furthermore, it is important to note that although 26 per cent of 
respondents  reported  a  significant  increase  in  sales  (response  code  six),  only  one 
respondent stated that the increase had been very significant.   

Figure 47  How does the current structure of excise duty affect the sales of fine-cut? 

Source:  Analysis of survey responses 

Another factor that may, for some countries at least, explain why we observe a rise in 
sales  of  RYO  tobacco  at  the  same  time  as  a  rise  in  price  might  be  retail  price 
differences  between  countries.  As  shown  in  the  figure  below,  there  are  some 
substantial  differences  in  price  between  neighbouring  Member  States.  Therefore,  it is 
possible that a country may experience a rise in demand from a neighbouring country 
even  where  its  retail  price  increased,  for  example  if  the  price  in  the  neighbouring 
country rose by a greater amount. 

Some of the price differences between countries – and the changes in price over time 
–  may  be  explained  by  differences  in  excise  duties  but  other  factors  also  play  an 
important  role.    For  example,  there  was  only  a  small  difference  in  excise  duties 
between Romania and Bulgaria in 2012 and hence the retail price difference in those 
countries  must  be  explained  by  other  factors.    In  this  case,  and  in  similar  cases,  it 
appears that excise duties do not have a significant influence on cross-border trade. 

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Figure 48  Price per kilogram of RYO tobacco, 2012 

Pipe tobacco 
The  graph  below  shows  that  there  has  been  relatively  little  change  over  time  in  the 
total  sales  of  pipe  tobacco  in  many  EU  countries  and  that  the  value  of  total  sales  is 
relatively  similar,  equal  to  or  less  than  €150  million.    However,  sales  in  Germany 
showed  some  fluctuation  over  the  period  while  those  in  Spain  increased  significantly 
from  2009  onwards.    To  some  extent,  the  increase  in  sales  of  pipe  tobacco  in  Spain 
offsets  the  decline  in  cigarette  sales  and,  as  per  the  discussion  above,  is  likely  to 
reflect down-trading by consumers during times of economic hardship. 

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Figure 49  Value of pipe tobacco sales 

Source:  Europe Economics’ analysis of Euromonitor data. 
Note:  Poland has been excluded from chart due to obscure data.  

The  graph  below  shows  that  pipe  tobacco  was  relatively  expensive  in  Sweden  and 
Ireland  between  2007  and  2012.    Indeed,  the  price  in  Sweden  was  generally  double 
that in most Member States.   

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Figure 50  Average pipe tobacco price 

Source:  Europe Economics’ analysis of Euromonitor data 

The chart below shows how the current structure of tobacco excise duties is perceived 
by  economic  operators  to  affect  sales  of  other  tobacco  (including  pipe  tobacco).  
Overall,  there  is  considered  to  have  been  little  impact:    77  per  cent  of  respondents 
stated that there has been no impact on the sales of other smoking tobacco. Just one 
per  cent  of  respondents  claimed  that  there  had  been  a  very  significant  decrease  in 
sales,  one  per  cent  selected  a  number  5,  and  the  other  20  per  cent  claimed  not  to 
know.  

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Figure 51:  How does the current structure of excise duty affect the sales of other smoking tobacco? 

Source:  Analysis of survey responses 

The  structure  and  level  of  excise  duties  may  also  affect  cross-border  trade  in  pipe 
tobacco, particularly for consumers located in border regions.  As shown in the figure 
below,  some  significant  price  differences  were  observed  between  neighbouring 
countries  in  2012.    For  example,  the  price  of  pipe  tobacco  in  Ireland  was  more  than 
double  that  of  the  United  Kingdom  and  hence  there  was  an  incentive  for  Irish 
consumers to cross the border to Northern Ireland to purchase pipe tobacco.  Some of 
this  price  difference  can  be  explained  by  excise  duties:    the  specific  duty  on  pipe 
tobacco  in  Ireland  was  almost  €190  in  2012,  while  it  was  less  than  €100  in  the  UK.  
Therefore,  excise  duties  are  likely  to  have  had  an  influence  on  cross-border  trade  in 
this  case.    This  conclusion  does  not  hold in  general,  however.    For  example,  there  is 
little difference in duties between Romania and Bulgaria, but a significant difference in 
retail  prices.    This  finding  again  confirms  that  excise  duties  are  not,  in  general,  the 
most important influence on cross-border trade. 

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Figure 52  Price per kilogram pipe tobacco, 2012 

Summary 
Our analysis of the extent to which the current structure and rates of the excise duties 
for  manufactured  tobacco  guarantee  the  proper  functioning  of  the  Internal  Market 
suggests the following conclusions: 

  the current structure and rates are generally considered to allow for neutral 

conditions of competition and the free formation of prices, although the MED is 
considered by some stakeholders to place a constraint on these; 

  changes in the level of excise duties can lead to substitution both within a given 
type of tobacco product (e.g. from premium to economy brands, or vice versa) 
and between different types of tobacco products (e.g. from cigarettes to RYO or 
vice versa); 

  however, many other factors affect demand for tobacco products (e.g. 

household incomes) and these influences can dominate excise duty changes; 
and 

  impacts do not seem to differ significantly between manufacturers as all 

manufacturers will adjust their product portfolios in line with demand (e.g. many 
manufacturers are currently entering the market for e-cigarettes in response to 
increased demand for this product).   

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Q3.4  What  is  the  impact  of  the  derogations  and  exceptions  granted  to/by 
certain  Member  States/EU  regions  in  application  of  the  tobacco  excise  duties 
on the Internal Market; 
The  preamble  to  the  2011  Directive  states  that  “in  order  to  prevent  damage  to 
Corsica’s economic and social equilibrium, it is both essential and justifiable to provide 
for a derogation, until 31 December 2015, by which France may apply a rate of excise 
duty  that  is  lower  than  the  national  rate  to  cigarettes  and  other  manufactured 
tobaccos  released  for  consumption  in  Corsica”.    Specific  derogations  were  included 
within  the  Directive  for:    Germany  and  Hungary  until  2014  (with  respect  to  the 
definition of cigarettes); Bulgaria, Estonia, Greece, Latvia, Lithuania, Hungary, Poland 
and  Romania  until  2017  (with  respect  to  the  rules  on  duties  for  cigarettes);  Portugal 
and  France  (with  respect  to  the  excise  duty  rules  on  cigarettes  in  their  remote 
communities  of  the  Azores,  Madeira  and  Corsica);  and  France  (with  respect  to  the 
excise duty rules on products other than cigarettes in Corsica).  

We  have  explored  the  extent  to  which  these  derogations  have  been  used  by  the 
eligible Member States and the impacts of these derogations through the stakeholder 
survey and interview programme. 

Derogations  and  exceptions  granted  to/by  certain  Member  States  have  multiple 
impacts, but according to the tax administrations of different Member States, some of 
these impacts are more significant in certain areas, as these rules are dependent upon 
geography. 

Out of 25 countries that responded to our questions on derogations, 11 reported that 
they are affected by derogations, or they know of the impacts that derogations carry. 
On  the  other  hand,  13  countries  state  that  derogations  do  not  cause  a  problem.  The 
remaining one did not know the impact of derogations. 

This  fairly  even  split  in  the  responses  of  the  tax  administrations  is  replicated  in  the 
responses of economic operators, as shown in the figure below. 117 

117 This graph corrects for any possible over-representation of answers by considering one answer for each 
economic grouping 

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Figure 53  Do derogations and exceptions granted to/by certain Member States/EU regions affect the activities 
of your organisation? 

Source:  Analysis of survey responses 

Some  of  the  impacts  highlighted  by  tax  administrations  and  economic  operators 
include: 

  Cross-border shopping 

Derogations  can,  in  principle,  create  a  price  differential  between  countries  and 
can therefore increase the amount of cross-border shopping. For the countries to 
which  the  derogation  applies,  this  would  have  a  positive  impact  on  sales. 
However,  for  the  neighbouring  countries,  there  would  be  a  negative  impact  on 
sales because they are  not able to compete with the derogations. For example, 
the  Slovenian  administration’s  view  is  that  derogations  and  lower  prices  in 
Croatia  and  Hungary  led  to  increased  cross-border  shopping.    However,  the 
physical  remoteness  of  certain  territories  where  derogations  apply  (i.e.  the 
Azores and Corsica where, in fact, this is part of the rationale for the derogation) 
makes this less of an issue. 

  Illicit trade and smuggling 

Derogations  can  also  increase  illicit  trade  and  smuggling  because  of  the  price 
differentials that they create. For example, the Republic of Ireland believes that 
the  transitional  period  granted  to  Bulgaria,  Estonia,  Greece,  Latvia,  Lithuania, 
Hungary,  Poland,  Romania  and  Croatia  in  the  Directives  has  had  an  effect  on 
ensuring  a  large  difference  in  excise  duty  rates  between  Ireland  and  some  of 
these  Member  States,  and  this  has  an  influence  on  cross-border  shopping  and 
illicit  trade,  particularly  smuggling  from  these  countries.    Nonetheless,  a 
significant proportion of all illicit tobacco originates from outside the EU. 

When  analysing  illicit  trade  and  illicit  activity,  one  has  to  keep  in  mind  the 
different  national  laws,  which  authorise,  or  not,  certain  tobacco  products.  A 

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famous example is the snus – a type of smokeless tobacco product derived from 
snuff; –in 2012, 8,210 boxes of  snus were confiscated in Finland: while snus is 
legal in Sweden it is illegal elsewhere in the EU.  

  Classification 

An  additional  problem  created  by  derogations  is  that  they  can  cause  confusion 
over the classification of different tobacco products. 

  Adaptation 

Derogations and exceptions are considered to have been very important for new 
Member States in order to allow them sufficient time to adapt to the EU rules. It 
is also noted that when new rules enter into force, one Member State may need 
more  time  to  adapt  than  others  and  so  derogations  can  be  beneficial  in  this 
context.    However,  it  is  important  that  derogations/exceptions  are  not  granted 
for  too  long  so  as  to  ensure  that  the  derogation  does  not  simply  help  the 
competitiveness of one Member State. 

Summary 
Our  analysis  of  the  impact  of  derogations  and  exceptions  has  identified  the  following 
key results: 

  there are mixed feelings amongst tax administrations and economic operators 

concerning the impact of derogations and exceptions; 

  those respondents that considered that there is a nontrivial impact of 

derogations and exceptions highlighted cross-border shopping, illicit trade / 
smuggling, classification uncertainty and ease of adaptation to be the key 
impacts. 

Q3.5  To  what  extent  non-harmonisation  of  anti-forestalling  measure  is 
detrimental to the proper functioning of the Internal Market? 
Anti-forestalling  measures  place  limits  on  the  number  of  cigarettes  that  can  be 
removed from duty suspension arrangements (e.g. excises warehouses and registered 
stores) in periods before a duty change is known or expected to occur. 

The  measures  are  not  harmonised  within  the  EU  at  present  and  this  may,  in  theory, 
have a detrimental impact on the functioning of the Internal Market, lead to economic 
operators  in  some  countries  being  disadvantaged  (e.g.  because  of  stricter  anti-
forestalling measures) and/or affect decisions of where to locate a business within the 
EU.  Indeed, it is interesting to note that, as shown in the figure below, approximately 
40  per  cent  of  respondents  to  our  survey  of  economic  operators  are  active  only  in 
countries  with  no  anti-forestalling  measures.    According  to  our  interviews  with  tax 
administrations,  anti-forestalling  measures  are  currently  applied  in  approximately  70 
per  cent  of  Member  States  (i.e.  all  member  States  other  than  Finland,  Germany, 
Austria, Greece, the Czech Republic, Ireland, Italy, Sweden and Spain). 

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Figure 54  Are there anti-forestalling measures applied in one or more of the Member States that you operate 
in?118 

Source:  Analysis of survey responses 

We  have  explored  the  extent  to  which  the  theoretical  problems  linked  to  the  non-
harmonisation  of  anti-forestalling  measures  are  borne  out  in  practice  through  the 
stakeholder  survey  and  interview  programme.    We  have  also  garnered  views  on 
whether stakeholders consider that there is a need for EU intervention. 

Current Measures  
There  are  many  anti-forestalling  measures  in  place  across  the  EU,  including  the 
following: 

  Cap on tax stamps 

Denmark  has  adopted  this  policy,  which  says  that if  tobacco  companies  buy  20 
per  cent  more  than  they  usually  purchase  between  31  October  and  31 
December, the purchase above the 20 per cent will then be considered a January 
purchase of the following year. 

  Cap on release for consumption 

This  policy  exists  in  a  number  of  countries.  For  example,  in  the  UK  companies 
face a limit on the total quantity of cigarettes that they release for consumption 
between  1  January  and  Budget  Day  (i.e.  the  date  on  which  changes  to  excise 
duties are announced). Cyprus and Luxembourg also limit the amount of tobacco 
that  can  be  released  for  consumption.  Portugal  limits  the  quantity  released 
between 1 September and 31 December to be equal to or less than the average 
of the past 12 months with a 10 per cent differential. Malta has a similar policy, 
in that a limit applies for one month prior to its Budget Day (when rate changes 
come into effect), set at the average of the past 12 months.  

118 This graph corrects for any possible over-representation of answers by considering one answer for each 
economic grouping 

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  Sell-by date 

A sell-by date creates a restriction on when products can be sold with certain tax 
rates.  In  Estonia,  when  a  new  tax  rate  is  implemented,  goods  can  be  sold  for 
three  calendar  months  after  the  date  of  the  new  rate.  Hungary  has  a  similar 
policy  in  which  wholesalers  must  sell  within  15  days  of  the  date.  In  the 
Netherlands,  manufacturers,  wholesalers,  and  importers  can  sell  cigarettes  and 
smoking tobacco products with an old tax stamp for up to two months after the 
new  tax  stamp,  but  the  policy  does  not  apply  to  retailers.  Finally,  in  Poland, 
stamps  are  only  valid  for  the  current  calendar  year,  and  up  to  the  last  day  of 
February in the next year.  

  Mixed 

A mixed policy, such as that used in Belgium, includes both a sell by date and a 
cap  on  releases  for  consumption.  Before  a  change  in  an  excise  duty,  tobacco 
companies are assigned a quota that is based on previous sales. They also have 
a certain amount of time to then sell their products with the old tax stamp.   

  Paying the tax difference 

In  some  countries,  when  there  is  an  increase  in  the  tax  rate,  wholesalers  are 
responsible  for  paying  the  difference.  In  Lithuania,  the  policy  applies  only  to 
cigarettes  still  held  by  the  wholesales  whereas  in  Latvia  and  Slovenia,  an 
inventory  is  taken  and  then  the  companies  must  pay  the  government  the  total 
tax difference. 

  Others  

Romania’s  policy  includes  applying  for  approval  for  release  for  consumption, 
which must be approved by the local customs office. Also, Croatia must apply for 
extra  tax  stamps.  Whether  or  not  they  are  approved  is  based  on  regular 
business  activities,  planned  expansion  of  the  tobacco  market,  and  the 
seasonality of the tobacco market. 

Impacts of anti-forestalling measures on the Internal Market 
According  to  feedback  from  economic  operators  there  are  both  positive  and  negative 
impacts of implementing anti-forestalling measures in a country. The benefits include 
reducing  volatility  in  the  market,  thus  protecting  jobs,  better  planning  and  allocation 
of  resources  and  fostering  effective  competition.  However,  anti-forestalling  measures 
impose  administrative  and  compliance  costs.  For  example,  many  countries  require 
economic  operators  to  perform  a  stock  count  or  change  their  tax  stamps  as  part  of 
their anti-forestalling policies. 

Despite the benefits cited above, several economic operators argue that a lack of anti-
forestalling  measures  does  not  have  negative  impacts  because  it  is  not  possible  to 
engage  in  excessive  forestalling.  The  rationale  for  such  a  statement  is  that  tax 
changes  are  generally  not  known  in  advance,  gradual  and/or  are  linked  to  inflation.  
This provides little incentive to engage in excessive forestalling.  

However,  a  counterargument  is  that  it  is  possible  for  the  entire  supply  chain  to  be 
affected  if  the  proper  anti-forestalling  measures  are  not  in  place,  because  tobacco 
manufacturers and wholesalers can then release large volumes of tobacco, prior to the 
increase and by doing so undermine the competitive position of other market players.  
Indeed,  one  economic  operator  argued  that  a  combination  of  lack  of  anti-forestalling 
regulation  and  large  excise  tax  increases  mean  that  market  functioning  is  severely 
disrupted  in  the  periods  immediately  before  and  after  a  tax  increase.  The  operator 

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stated that some operators use excise tax increases as a tool to gain market share by 
releasing  for  consumption  large  amounts  of  tobacco  products  prior  to  an  excise 
increase.  It was argued that this allows them to delay increases in their retail selling 
prices and so artificially improves their competitive position. 

As  a  consequence  of  such  practices,  the  respondent  argued  that  all  other  operators 
are forced to follow and engage in forestalling themselves or see their market shares 
eroded.  In  the  recent  past  the  practice  has  become  more  evident  (also  due  to  the 
large  increase  in  excise),  with  some  operators  forestalling  the  equivalent  of  several 
months'  worth  of  sales  in  correspondence  of  excise  increases.  From  an  operational 
point of view, the economic operator perceives the main negative effects to be a loss 
of  efficiency  associated  with  having  to  deal  with  artificially  high  peaks  in  production, 
distribution, etc., and with the increase in working capital.  

Harmonisation of anti-forestalling measures 
Some  economic  operators  consider  that  the  lack  of  a  single  overarching  anti-
forestalling measure throughout the European Union means that the functioning of the 
Single Market is impeded. However, it is recognised that with the different features of 
the  tobacco  market  and  different  approaches  to  duty  collection  that  already  exist  in 
different countries, it is nearly impossible to implement one anti-forestalling policy. For 
example,  a  solution  based  on  a  cap  on  the  number  of  tax  stamps  supplied  to 
manufacturers/importers,  could  certainly  not  form  the  basis  for  a  common  anti-
forestalling  system,  as  several  Member  States  do  not  use  tax  stamps  (or  other  fiscal 
markers)  for  excise  collection.  Therefore,  while  a  single  policy  would  increase 
predictability and would most likely simplify the process, thereby potentially reducing 
administrative  and  compliance  costs,  at  least  for  international  operators,  such  a 
solution  is  not  feasible  until  there  is  greater  harmonisation  of  other  features  of  the 
Member States’ tobacco markets.  

In  general,  tax  administrations  agree  that  it  is  not  feasible  to  have  the  same  anti-
full 
forestalling  policies  across  all  Member  States:  no  respondent  proposed 
harmonisation and the majority of Member States are in fact opposed to a harmonised 
approach  at  EU  level.119  However,  most  agreed  that  an  overall  framework  for  anti-
forestalling  measures  within  the  European  Union  should  be  provided.  This  framework 
would  clarify  what  policies  are  acceptable,  and  what  policies  are  not.  The  Member 
States would then have the freedom to set their policies within the guidelines outlined 
by the EU. 

Summary 
Our  assessment  of  the  extent  to  which  non-harmonisation  of  anti-forestalling 
measures  is  detrimental  to  the  proper  functioning  of  the  Internal  Market  has  found 
that: 

  a wide range of measures are currently in place across the EU; 

  the measures in place are considered to be beneficial by tax administrations and 
some economic operators, but other economic operators feel that the measures 
are not effective; and 

  the lack of harmonization is perceived to somewhat hinder the functioning of the 

single market but there is little call for harmonization by either tax 
administrations or economic operators. Full harmonization is not considered 

119  This  position  has  been  made  clear  both  in  the  context  of  this  study  as  well  as  in  the  context  of  the 
Fiscalis workshop on tobacco excuse duty in Vilnius, September 2013 

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feasible in the absence of harmonisation of tax collection systems (e.g. tax 
stamps, fiscal markings, etc.). 

Overall Conclusions 
Overall, we find that the current arrangements for excise duty on tobacco products do 
not  fully  ensure  the  proper  functioning  of  the  Internal  Market  and  are  not  fully 
adequate  to  ensure  the  avoidance  of  distortions  in  competition.  The  key  findings  in 
support of this conclusion are: 

  MED is applied only in certain Member States and the level differs significantly.  
It affects the relative price of economy cigarettes and affects relative prices 
between Member States. 

  Other than the MED, however, there is no clear evidence of changes in trade 
patterns being induced by recent changes in the tobacco excise duty levels. 

  Furthermore, the current structure and rates generally allow for neutral 

conditions of competition and the free formation of prices, with the exception of 
the MED. 

  Derogations and exceptions seem to have had a limited impact on cross-border 
shopping and illicit trade.  They can create confusion on classification but can 
help adaptation for new Member States. 

  The inconsistent treatment of a number of tobacco products and of e-cigarettes, 

as analysed as part of Question 2 may also have a negative impact on the 
functioning of the internal market. 

The  lack  of  harmonisation  of  anti-forestalling  measures  somewhat  hinders  the 
functioning of Internal Market but there is no call for full harmonisation. 

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Question 4: To what extent are the current arrangements for 
excise  duty  on  tobacco  products  implemented  in  a  cost-
effective way? 
While  the  previous  questions  investigated  the  extent  to  which  the  current  provisions 
on  the  excise  duty  allow  for  safeguarding  the  budgetary  interests  of  the  Member 
States  (Q.2)  and  ensuring  the  proper  functioning  of  the  Internal  Market  (Q.3),  Q.4 
engages with the issue of efficiency, i.e. with the administrative costs falling on tax 
administrations and economic operators.  

By  systematically  mapping  key  activities  carried  out  by  tax  administrations  and 
economic operators, it has been possible to identify those that are perceived as being 
more  resource  intensive,  i.e.  present  the  greatest  room  for  improvements.  A  first 
round  of  consultation  with  economic  operators  and  tax  administrations  supported  a 
high-level  identification  of  activities  and  functions  which  have  been  then  explored  in 
detail  through  case  studies.  Inputs  from  the  survey  to  economic  operators  have  also 
been  included  to  provide  further  insight  into  certain  phenomena.  By  merging  these 
sources  it  has  been  possible  to  identify  costly  activities,  and  gain  a  better 
understanding of the driving factors and the consequences.  

Given  the  breadth  of  the  set  of  activities  and  procedures  carried  out  by  tax 
administrations and economic operators on a daily basis to comply with the provisions 
of the current system, it has been decided to structure the answers to Q.4.1 and Q.4.2 
according to key thematic areas. These are:  

  pre-authorisation of economic operators;  

  production, holding and storing of tobacco products; 

  trade and logistics of tobacco products;  

  definitions and classification; and  

  dual coding.  

For  each  thematic  area,  a  brief  explanation  on  the  key  activities  carried  out  will  be 
provided. This will represent the basis for estimating the amount of resources spent 
by  the  relevant  actors  and  for  identifying  those  which  are  more  problematic  from  an 
efficiency standpoint. 

This chapter presents the results of the analysis of data collected in the context of the 
case studies, for a complete, descriptive, overview of the features of tobacco collection 
systems  can  be  found  in  Appendix  5  –  Question  1:  Background  Information; 
specifically with respect to answering Q1.2; Q1.3 and Q1.4. 

Q4.1 Are there any administrative tasks, monitoring or control procedures that 
could  be  improved  in  order  to  achieve  a  high  level  of  efficiency  for  the  tax 
authorities (i.e. in terms of administrative costs)? 
This  section  builds  on  the  information  collected  through  the  questionnaire  to  tax 
administration, the case studies in 5 countries and desk research. 

Pre-authorisation of economic operators 

Activities 

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This theme encompasses the activities carried out by the tax administration following 
a  request  for  authorisation  by  an  economic  operator.  An  overview  has  already  been 
provided in Q.1.3.  

The  activities  carried  out  at  this  stage  by  tax  authorities  are  quite  standardized  as 
they usually encompass: 

  The analysis of the documentation provided by the economic operator (e.g. 

legal, financial information, business plan),  

  Intelligence work and background checks on the people involved in the business 

and on the company,  

  Analysis of the supply chain and the economic viability of the undertaking. 

These  activities  are  most  of  the  time  followed  by  the  physical  inspection  of  the 
premises,  especially  in  the  case  of  warehouse  keepers,  to  verify  the  security 
arrangements  for  the  control  of  goods,  persons  (company  personnel,  visitors, 
maintenance  contractors,  etc.)  and  vehicles  as  well  as  the  truthfulness  of  the 
information provided. The results of these processes are used to build a profile risk of 
the operator and to calculate the size of the guarantee to be provided. 

Resources 
Certain countries set time limits for responding to a request. This is the case of among 
others the UK (45 days) and EL (15 days). Others do not have specified time limits. In 
FI, the whole application process (including the amendment of an existing licence) can 
take up to 2 months (excluding the calculation of the guarantee).  

In terms of human resources, the situation varies a great deal across countries: in FI, 
10-15 people have been reported to be involved throughout the whole process (even 
though the bulk of the work is conducted by 1-2 people), while in other countries (e.g. 
UK),  dedicated  departments  exist  for  the  authorisation  process.  In  the  latter  case, 
they would usually deal with all excise goods not only tobacco products. 

Efficiency  
Member  States  did  not  report  significant  costs  related  to  performing  these  activities. 
Processes  are  generally  regarded  as  efficient,  also  considering  the  small  amount  of 
requests  received.  Indeed,  given  that  the  specificities  and  the  history  of  the  tobacco 
market,  relatively  few  requests  are  submitted  on  a  yearly  basis.  The  number  ranges 
between  1  and  20-30  a  year  including  amendments  of  existing  authorisations.  The 
reason  is  that  this  market  is  quite  concentrated  with  very  large  long  established 
tobacco manufacturers (often holding multiple authorisations) controlling a significant 
share  of  the  market.  As  a  consequence,  new  applications  mainly  concern  smaller 
operators which pose less of a burden on the national administrations. 

Reported resource intensive activities include the risk assessment of the premises and 
of the business (i.e. economy of the company), and the calculation of the guarantee. 
For instance, in FI the calculation of the guarantee can take between 2 weeks and 3-4 
months (2 weeks up to 1 month of actual work), thus the tax authority excluded this 
activity from the pre-authorisation process upon payment of a smaller guarantee.  

Production/Holding/Storing of tobacco products 

Activities 
The  activities  falling  within  this  area  include  analysis  of  the  information  and  data 
collected from economic operators through 

  Periodical reports for accounting purposes; 

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  Intelligence work; 

  Audit-based and physical inspections.  

Data  form  different  sources  are  used  to  perform  cross-checks.  Audits  are  aimed  at 
verifying  the  correspondence  between  the  stocks  of  tobacco  products  and  the 
supporting  documentation  and  assuring  that  commercial  records  for  the  receipt, 
production, storage and removal of excise goods live up to the agreed standards. On-
site inspections entail the controls of the premises, the verification of the procedures, 
the  continued  compliance  with  the  terms  of  the  authorisation  and,  where  applicable, 
the check of the balance of fiscal marks.  

Resources 
In terms  of  resources  spent on monitoring the production and the holding of tobacco 
products, it has proven challenging for tax administration to come up with a figure due 
to the fact that often the units deputed to carry out these controls are responsible for 
different (if not all) excise goods. In Denmark, 5 full-time employees are estimated to 
deal with tobacco products while in Greece the number is estimated at 25-30 units. In 
the  UK,  a  dedicated  unit  called  Large  Business  Service,  serves  as  the  single  contact 
point for large enterprises on all the issues related to taxation, including excise duties: 
3-5 people work in the tobacco field. 

Efficiency 
None  of  the  interviewed  tax  administrations  reported  the  existence  of  resource 
intensive  activities.  Physical  inspections  by  nature  entail  a  larger  absorption  of 
resources  (up  to  2  weeks).  However,  they  are  conducted  on  the  basis  of  risk 
assessment. In this respect, one country reported to apply a differentiated approach in 
terms of frequency and thoroughness of the checks based on the risk category of the 
economic operator.  

As  a  consequence  it  seems  that  the  possibility  to  conduct  risk  analysis  is  the  key 
aspect  for  guaranteeing  an  efficient  functioning  of  the  tax  administration.  As  pointed 
out  in  Q.1.5,  this  depends  on  the  availability  of  data  as  well  as  of  IT  tools  for  the 
analysis of the data.  

Trade and logistics of tobacco products 

Activities 
For  the  monitoring  of  the  movements  of  tobacco  products,  Member  States  rely  on 
EMCS. A dedicated application within EMCS, known as MVS, is used for the monitoring 
of the movements of duty-paid goods even though the level of detail and automation 
of the process is rather limited. 

Activities falling within the scope of these filed encompass: 

  Verifying the correspondence of the tobacco products with the supporting 

documentation and the compatibility of the quantities with the accounting data 

  Carrying out risk assessment based on the data from EMCS and other sources 

(e.g. customs’ databases); 

  Conducting inspections of premises and vehicles; 

  Checking use and movement of excise stamps (e.g. in Greece, operators  have 5 
months after buying excise stamps to release the products for consumptions or 
return the them); 

  Exchanging information with other tax administrations across the EU.  

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Resources 
In the case study countries, interviewees reported that few people and resources are 
used for the monitoring of the movement of tobacco products. In  Romania, less than 
100 FTEs are involved on the monitoring of excise goods including people in the filed 
conducting inspection, while in Denmark the overall management of EMCS absorbs 0.5 
FTE.  The  possibility  to  use  an  electronic  tool  such  as  EMCS  has  been  pointed  at  as a 
major contributor to the increased efficiency in this field.  

Efficiency 
As  in  the  case  of  activities  conducted  for  the  monitoring  of  production  and  storing  of 
tobacco  product,  tax  administrations  did  not  encounter  particular  difficulties  and  do 
not  regard  the  activities  connected  to  the  monitoring  of  logistics  as  being  resource 
intensive. 

At  the  same  time,  in  some  countries  simplified  procedures  are  in  place  to  further 
reduce  the  burden  of  conducting  certain  operations.  In  the  UK  and  in  Denmark,  the 
movement  of  duty-suspended  goods  in  the  national  territory  needs  not  be 
accompanied  by  the  coverage  of  an  electronic  guarantee.  In  fact,  commercial 
accompanying documents are sufficient. 

Direct  delivery,  whereby  a  trader  (usually  consignee)  can  have  the  excise  goods 
delivered  at  a  third  party  address,  helps  reduce  the  overall  number  of  movements. 
The  fact  that  such  an  arrangement  may  be  only  granted  to  selected  economic 
operators,  in  the  opinion  of  one  respondent,  allows  for  striking  a  balance  between 
economic savings and higher risk entailed by such movements. 

Given  that  the  a  substantial  part  of  the  work  conducted  in  this  field  is  based  on  risk 
analysis, as in the case of production and storing, the availability of data and IT tools 
is key to safeguarding efficiency. In this respect, a number of Member States pointed 
out  that  the  exchange  of  information  between  tax  administrations  within  already 
existing  means  of  administrative  cooperation  could  improve  the  monitoring  abilities. 
While  respondents  agree  that  this  is  one  of  the  main  tools  for  fighting  against  a 
problem  that  has  a  cross-border  nature,  no  examples  of  systematic  sharing  of 
information exist. Moreover, individual requests for assistance are rarely answered in 
a timely manner, thus jeopardizing the benefits from such a tool.   

Definitions and classification 

Activities 
The  classification  of  tobacco  products,  i.e.  the  decision  that  a  certain  product  is 
consistent with a definition as per Directive 2011/64/EU, is the result of an articulated 
set of activities. In the case of products being manufactured/imported/discovered for 
the first time, the procedure might include one or more of the following activities: 

  Analysis of the information (e.g. description, technical specifications, samples, 

chemical analysis) provided by the economic operator when 
manufacturing/importing of the tobacco products; 

  Laboratory tests conducted by the tax administration (through own laboratories, 

customs’ laboratories, or private service providers); 

  Request of any additional information deemed necessary for the correct 

classification (to the discretion of the tax authority); 

  Possibility for the economic operator to appeal the decision of the administration 

or to ask for a Binding Tariff Information, a decision issued by the customs 
administration of a Member State valid throughout the Community. 

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These procedures might vary depending on the origin of the goods. Locally registered 
manufacturers  are  usually  requested  to  provide  a  standardized  set  of  information  on 
the  new  product  before  launching  it  in  the  market  together  with  a  proposed 
categorisation in terms of both CN code and excise tax code (e.g. RO, EL). If there is 
any  doubt  regarding  the  tax  treatment  of  this  product,  laboratory  testing  may  be 
requested. On the other hand, economic operators importing a (new) tobacco product 
are usually subject to more thorough controls for verifying the correct classification of 
the  goods.  These  controls  usually  consist  of  visual inspections  conducted  by  customs 
officials when the customs declaration (and the tariff classification) is done and, unless 
special warns are raised, do not entail lab tests.  

It  should  be  noted  that  not  all  countries  have  predefined  and  structured  process  for 
the classification of products. To a high extent, procedures are adapted to the specific 
case. For instance, in the UK it is up to the Large Business Service to decide whether 
further  investigation  is  needed  when  a  large  operator  introduces  a  new  product.  In 
complex cases, the opinion of a specialized Binding Classification Team can be sought. 
In  other  instances  (e.g.  DK)  the  economic  operator  is  not  obliged  to  give  the  tax 
administration prior notice of the introduction of a new product in the market.  

When  dealing in  products  that  have  already  been  classified,  it  is  the  responsibility 
of  the  economic  operator  to  report  the  correct  codes.  Controls  are  less  systematic  in 
this case and may only consist of visual inspection, unless a specific risk is identified.  

Resources 
While procedures vary between countries and specific cases, the information collected 
in the case study countries allows for a rough estimate of the administrative activities 
this process entails. 

In  general,  costs  have  been  assessed  to  be  moderate  or  low.  In  the  case  study 
countries visited, where a systematic process takes place, it takes between 15 and 90 
days for the tax administration to come out with a final decision on the classification of 
a new product, depending on the workload of the relevant services and the degree of 
complexity of the case at stake. Between 2 and 3 days would be spent on conducting 
the  analysis  and  reporting  the  results.    Once  the  results  are  ready,  the  relevant 
customs  department  would  give  a  decision  within  2-3  days    and,  if  conducted  by  a 
separate department, another 2-3 days will pass until the excise code is assigned. 
Efficiency  
The  vast  majority  of  the  Member  States  reported  that  the  current  rules  on 
classification/definition  do  not  create  additional  or  unnecessary  administrative 
costs. Tax administration claimed that activities  such as lab tests are more  resource 
intensive. Meanwhile, they are only conducted in the context of investigations or when 
particularly complex cases appear on the market. This is reported to be rare event (on 
average once a year). Moreover, the market for tobacco products is mostly dominated 
by  a  small  number  of  large  companies  which  would  usually  liaise  with  tax 
administrations  before  launching  a  new  product  thus  reducing  the  costs  entailed  by 
classification.  

Quite interestingly, though, 4 countries  reported that current definitions  impinge  on 
the  efficient  functioning  of  the  tax  administration  in  a  more  indirect  way.  Indeed, 
the lack of definitions for certain products and/or the open wording of the Directive (as 
discussed  in  Q.2)  have  led  in  some  cases  to  a  different  tax  treatment  of  the  same 
product  between  Member  States.  The  legal  uncertainty  stemming  from  such  a 
phenomenon may require the conduction of an investigation and possibly the opening 
of a case in court. In both cases resources would need to be diverted from other tasks 

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and  this  might  disrupt  the  functioning  of  the  tax  administration.  Furthermore,  the 
outcomes of the investigations or the law rulings might entail a revision of the relevant 
legislation  which  would  translate  into  increased  (transitional)  costs.  Table  22  below 
summarizes  some  of  the  cases  reported  by  tax  administrations  and  highlights  what 
kind costs their solution entailed.  

Table 22 Examples of issues stemming from classification with impact on efficiency 

Tobacco product 

Issue 

Country affected120 

Administrative burden 

Raw tobacco leaves 
(whole or cut) 

Reconstituted 
tobacco 

Tobacco refuse 

Interpretation of “capable 
of being smoked without 
further industrial 
processing” 

Interpretation of “capable 
of being smoked without 
further industrial 
processing” 

Interpretation of “capable 
of being smoked as they 
are“ 

UK, IT, SE 

Court-case  

RO 

Administrative 
ruling/guidance 

(Pending) 

DE, CZ 

Court-case 

Cigars/Cigarillos 

(e.g. Silverado) 

Definitions of cigarettes 
and cigars/cigarillos 

BE 

Cigar-like tobacco "sticks" 
that can be used for 
rolling cigarettes 

The main problem was/is 
the loose legal term 
“capable of being smoked 
as they are“ 

Interpretation of “being 
capable of being smoked 
without further industrial 
processing” 

PL 

DE 

HU 

Lack of specific definition 

PL, IT 

Cigars (e.g. 
Gullivers, Party 
Cigars) 

Tobacco-free water-
pipe tobacco  

Fine- cut tobacco 
delivered in bulk 

Aromatic products 
intended for 
refreshing air which 
could be used as 
water-pipe tobaccos 

Administrative ruling 

Court-case  

Binding Tariff 
Information  

Administrative ruling 

Objection raised to the 
economic operator; no 
need for court ruling 

Laboratory tests  

Court-case 

Administrative ruling 
(other smoking tobacco 
if containing tobacco); 
Court-case 

When  asked  what  the  source  of  the  added  complexity  is,  tax  administrations  listed 
the following: 

  Loose formulation of certain requirements (e.g. “capable of being smoked as 
they are“, “industrial processing”) which create confusion in among economic 
operators and departments within the tax administration;  

  Lack of definition of certain tobacco products which led to cases where the  same 
product is considered excisable in some countries and not excisable in others 
(e.g. tobacco refuse, raw tobacco, expanded shredded stems);  

  Inconsistencies with the definitions provided in the Explanatory notes to the 

Common Nomenclature121. 

120 Countries are meant to be for example purposes, not an exhaustive list 

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Dual coding 

Activities 
As  extensively  discussed  in  Q.2,  there  exist  two  non-fully  consistent  systems  for  the 
classification  of  tobacco  products:  the  categorisation  according  to  the  definitions  laid 
down  in  Articles  2-5  of  Directive  2011/64/EU  for  excise  purposes  and  the 
specifications  contained  in  the  Explanatory  Notes  to  the  CN  system  for  customs 
purposes.  In  the  context  of  the  monitoring  of  the  movements  of  tobacco  products 
under  duty  suspension  arrangement,  i.e.  under  EMCS,  the  presence  of  a  dual  coding 
system  might  create  several  problems,  including  inconsistent  treatment  of  the 
products  across  time  and  countries,  unfair  competition  between  product  groups, 
impossibility to create certain combinations between CN and excise duty codes. 

The activities performed by tax administrations for coping with the presence of a dual 
classification  system  vary  across  Member  States  depending  on  the  degree  of 
integration between the tax administration and the customs authority. Where the two 
are separated, the use of dual coding is reported as not creating major disturbances to 
the  efficient  functioning  of  the  system,  as  each  administration  would  use  its  own 
datasets  and  procedures.  In  instances  where  the  degree  of  integration  between  the 
two authorities is higher (e.g. FI, EL, RO), the customs administration leads the way, 
in the sense that it would be either responsible for conducting the lab analysis for both 
excise  and  customs  purposes  or  its  decision  on  the  treatment  according  to  the  CN 
coding system would determine the tax treatment. 

Resources 
It  has  proven  challenging  for  the  interviewed  tax  administrations  to  estimate  the 
resources needed for dealing with the presence of a dual coding system. 

One country reported that the analysis of a sample of tobacco product costs EUR 100-
150  and  that  the  need  to  conduct  slightly  different  procedures  for  the  two  coding 
systems  would  not  entail  a  doubling  of  the  costs.  Another  Member  States  estimated 
the  costs  to  be  around  EUR  200  per  analysis  and  the  extra  cost  for  the  dual 
classification amounting to not more than 10%.  

In  all  other  cases,  direct  costs  stemming  from  the  dual  coding  system  have  been 
reported  as  being  negligible  considering  the  small  number  of  analyses  conducted  for 
classification purposes.    

Efficiency 
From  the  point  of  view  of  efficiency,  the  subject  matter  of  the  present  section,  there 
are  two  main  reasons  why  the  presence  of  dual  coding  might  affect  negatively  the 
functioning of the tax administration. Firstly, tax administrations might encounter the 
need  to  perform  duplicate  analyses  whenever  a  product  needs  to  be  classified 
(especially in those cases where the  responsibility for the monitoring is differentiated 
between  the  tax  administration  and  the  customs  authority).  Secondly,  additional 
resources  might  need  to  be  spent  on  reconciling  the  information  collected  for  excise 
and customs purposes to spot possible inconsistencies. 

When  asked  whether  the  current  system  creates  complexity  or  increases  the 
administrative  costs,  13  Member  States  reported  that  they  do  not  experience  any 
problem. In most countries, a single analysis is performed such that the information 
can be used for both classifications. In several instances the classification for customs 
purposes precedes the  classification for  excise  purposes.  In some  countries (e.g. RO, 

121 This aspect will be discussed in greater detail in the next section 

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UK),  there  exists  a  “conversion  table”122  that  links  CN  codes  and  (national)  tax  type 
codes,  i.e.  the  categories  laid  down  in  the  Directive,  thus  the  matching  is  done 
automatically.  In  other  cases  (e.g.  FI,  PT)  the  customs  and  the  tax  authorities  share 
the  same  premises  and  resources,  thus  the  result  of  the  analysis  would  serve  both 
aims.  

As  many  as  10  countries  reported  that  dual  coding  creates  some  problems.  These 
are mainly related to uncertainties on how to link CN codes and each tax type codes. 
The impact on the efficiency might come from:  

  The need to consider each case twice: once for customs, and once for excise 

purposes. Even though costs are not twice as high, there is an increase in costs; 

  The need to adapt the technical specification of the EMCS to allow for the right 

combination of CN codes and tax type codes; 

  Allocating time to solve some inconsistency between the two systems. Moreover, 
as pointed out by one country, the fact that investigative units are more familiar 
with the CN coding system, they will be particularly vulnerable to efficiency 
losses caused by inconsistencies, especially in the absence of an unequivocal 
correspondence.  

At the same time, as pointed out by several tax administrations, inconsistencies in the 
two  classifications  create  loopholes  and  legal  uncertainty.  These  in  turn  have  the 
potential to lead to disputes which can be resolved in three ways: 

  The economic operator accepts the decision of the tax administration (which 
might take the form of either an administrative ruling or an administrative 
guidance);  

  The economic operator requires a BTI through the national tax administration: 

this has been reported to take around 3 months; 

  The economic operator can challenge the tax administration in court: in this case 
time and resources are difficult to assess and would depend on the terms of the 
dispute. 

In all cases, additional resources would be spent by all parties to sort out the dispute 
thus  resulting  in  increased  costs.  Table  23  below  reports  on  the  disputed  cases  and 
the way they were sorted out.  

Table 23 Examples of issues stemming from dual coding with an impact on efficiency 

Tobacco product 

Issue 

Country affected123 

Administrative burden 

Cigars/Cigarillos 

(e.g. Break, Partner, 
West, L&M) 

Directive only focuses on 
the existence of an outer 
wrap, regardless of 
whether the filter is 
covered or not. based on 
tariff regulations, it 
depends on the filter being 
covered or not whether 
the product is considered 
a cigar/cigarillo or as a 
cigarette  

DE, LT, NL, PT, EL, PL 

Court-case  

Binding Tariff 
Information  

122 The conversion is not automatic or binding but it serves as a guide. 
123 Countries are meant to be for example purposes, not an exhaustive list 

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Summary 

Our  analysis  of  the  impacts  of  the  current  provisions  on  excise  duty  on  the  efficient 
working of national tax administrations provides the following key findings: 

  Pre-authorisation: in light of the limited number of request received, no major 

issues have been reported;  

  Production/Holding/Storing:  the possibility to efficiently use resources depends 

on the extent to which risk analysis is systematic and sound, i.e. on the 
availability of data as well as of IT tools for the analysis of the data; 

  Movement of tobacco products: tax administrations did not encounter particular 

difficulties and do not regard the activities as being resource intensive. The 
exchange of information between tax administrations across the EU has been 
reported as being an important tool to fight against illicit trade but it is not a 
fully exploited tool; 

  Definitions and classification: the majority of the Member States reported that 

the current rules on classification/definition do not create additional or 
unnecessary administrative costs. However, some countries were concerned with 
the costs entailed by legal uncertainty, if disputed cases were to appear more 
frequently;  

  Eliminating the legal uncertainty with respect to the treatment of reported 

“borderline” products would potentially lead to a higher level of efficiency for tax 
authorities. 

  Dual coding: it is the opinion of the majority of Member States that dual coding 
creates no or limited additional costs. Some respondents however pointed out 
that in a small number of instances legal uncertainty translated into some 
additional costs as economic operators challenged the classification made by the 
authority. 

Q4.2 Are there any administrative tasks, monitoring or control procedures that 
could  be  improved  in  order  to  achieve  a  high  level  of  efficiency  for  economic 
operators (compliance costs)? 
This  section  replicates  the  structure  devised  for  Q.4.1  so  as  to  facilitate  the 
comparison of the results. The approach by “key thematic areas” benefits from the 
results  gained  through  the  online  survey  to  economic  operators  and  the  interviews 
conducted during the case studies, as well as from the results of the desk research. 

Pre-authorisation of economic operators 

Activities 
Mirroring the activities that the tax administration needs to carry out when deciding on 
the award of a license, economic operators are responsible for initiating the process by 
filing a formal request together with the required documentation. As already explained 
this initial information is aimed at verifying the compliance with legal, economic (e.g. 
business plan), financial and operational (e.g. accounting system) requirements and to 
demonstrate the ability to carry out an excise business. In some countries, as part of 
the information to be provided, an economic operator must demonstrate the economic 
need for setting up such a business. 

Applicants  are  usually  requested  to  (be  in  the  condition  of)  lodge  a  financial  security 
such  as  a  guarantee  to  cover  potential  losses  related  to  the  conduction  of  the 
business. Sometimes, as it happens in Finland, an initial minimum financial guarantee 
is  provided  while  the  tax  administration  conducts  all  the  checks  necessary  for  the 

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calculation  of  the  exact  amount.  In  other  cases,  the  size  of  the  guarantee  will  be 
calculated before the approval agreement is signed.  

When seeking authorization for a premise, a description of the security arrangements, 
and  a  description  of  the  physical  and  technical  features  of  the  facilities  must  be 
provided  to  the  tax  authority  together  with  the  blueprints  of  the  premise.  Physical 
inspection is usually conducted to verify the truthfulness of the  reported information. 
If, on the basis of the inspection, improvements are required, they will be paid for by 
the  economic  operator.  In  IT,  authorized  manufacturers  must  also  bear  the  costs 
related  to  providing  a  physical  space  and  the  technical  equipment  to  the  unit  of 
officers permanently stationed at the premise. 

While  in  some  cases  authorizations  do  not  have  a  pre-defined  expiry  date,  they  are 
valid  as  long  as  the  operator  complies  with  all  the  requirements,  in  other  instances 
(e.g. RO) these need to be renewed periodically.  

Resources 
In  the  case  studies  countries,  economic  operators  faced  difficulties  in  recalling  the 
time spent on these activities either because the authorisation was issued many years 
ago  and  did  not  require  renewal  or  because  the  time  and  resources  spent  were 
assessed as negligible.  

Based  on  the  available  information,  it  takes  between  1  and  6  months  between  the 
submission  of  the  application  and  the  release  of  the  authorisation/amendment  to  the 
authorisation.  One  economic  operator  reported  that  the  amendment  to  an  existing 
licence  took  11  months  but  the  tax  administration  was  able  to  issue  a  temporary 
authorisation while conducting the necessary checks. 

While  it  may  seem  that  the  time  spent  on  this  activity  is  significant,  the  actual  work 
performed by the economic operator can be estimated to be 1-20 days for a first-time 
authorisation or for the renewal (depending on the countries)  

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The costs of obtaining/renewing an authorisation in Romania 
As in Romania authorisations are subject to renewal every 3 years, it has been possible 
to estimate the costs of each step on the basis of the information provided by three 
economic operators. The documentation to be provided incudes: 

  Balance sheets for the last 2 years 

  Criminal records of the administrators 

  Certificate from the Registry of Commerce 

  Manufacturing licenses issued by the Ministry of Agriculture 

  Documents to prove usage right over the premises proposed to be authorized 

(property documents / rent agreements) 

  Declaration regarding the maximum storage capacity, the quantities and the types 

of excisable goods 

  Fiscal attestation certificate & Fiscal record certificate 

  Confirmation from the fiscal authorities regarding the status of the company as 

excise tax payer  

  Calculation of the guarantee proposed 

  Letter of intention from the bank which will submit the guarantee 

  Preparing the file to be submitted to the authorities 

These  activities  add  up  to  90-170  hours  depending  on  whether  it  is  a  first  time 
application or a renewal of an existing one.  

Efficiency 
The most resource intensive activities refer to three aspects: 

  Types of documents: certain documents have been reported to be accessible by 

tax authorities thus they should not be requested to the operator; 

  Types of authorisation: warehouse approvals were reported by one operator to 

be particularly time consuming as they entail several government 
administrations to coordinate; 

  Type of communication with the administration: in one country the economic 

operator lamented that it is difficult to interact with the tax administration as it 
is not possible to contact case workers and requests might take between 30 and 
90 days before being answered. In another country an economic operator 
pointed out that electronic applications are more efficient than paper-based 
ones. 

Overall,  no  major  inefficiencies  stemming  from  the  current  provisions  could  be 
identified. According to operators, some room for improvement exist, however, given 
that gaining an authorisation is either a one-off procedure or it occurs every couple of 
years, the costs do not significantly impact on the efficiency of the economic operator. 
This  conclusion  should be  interpreted  with  care  as  the  sample  of  economic  operators 
interviewed  only  comprised  large  businesses:  it  might  be  the  case  that  smaller 
operators face greater costs. 

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Production/Holding/Storing of tobacco products 

Activities 
The survey and the interviews with economic operators allowed for the identification of 
the  activities  performed  in  order  to  comply  with  the  requirements  in  terms  of 
production, holding and storing of tobacco products. 

The following activities have been most often included in the calculations of time spent 
(mainly by warehouse keepers): 

  Keeping, for each tax warehouse where tobacco products are manufactured, 
detailed accounts of records showing the quantities and description of: all 
materials received, all materials used in each manufacturing batch, all materials 
disposed of, any refuse deriving from materials used, all refuse disposed of; 

  Keeping accounts of stock and movements of excise goods including a minimum 
set of information (e.g. date, type of tobacco product, brand, size of retail pack, 
description of the goods, duty status, current location within the warehouse), 
including periodical stocktaking;  

  Periodical submission of reports and notifications, including where applicable 

declaration of duty stamps: this can be made daily as in the UK and EL, or less 
frequently (e.g. quarterly in DK); 

  Establishing and maintaining guarantees to cover the risk inherent in the 

production, processing and holding of excise goods; 

  Setting up and operating an appropriate marking system such that goods can be 

identified in the stock account in a univocal manner; 

  Complying with obligations related to the holding for commercial purposes of 

goods in another MS other than the one in which they were released for 
consumption; 

  Facilitating the work of the tax administration in case of audits or physical 

inspections. 

Registered  consignees  and  temporary  registered  consignees  are  subject  to  less 
stringent  requirements,  indeed  they  are  usually  requested  to  keep  delivery  receipts, 
commercial documents and copies of the e-AD when goods move under suspension of 
excise duty. 

Resources 
The compliance costs of carrying out all activities related to the production and storing 
of  tobacco  products  have  been  estimated  to  be  between  1  and  4  FTEs  for  record 
keeping, notification and reporting. Additional resources are spent obtaining a financial 
security, but these are said to be limited (2-5 man days a year).124 

Finally, inspections might be carried out to the discretion of the tax administration or 
on a regular basis. Larger manufacturers reported that this event is rare (once every 
couple  of  years)  and  entails  neither  disruption  of  the  activities  nor  absorption  of 
significant resources. 

In a cross-country perspective, transnational companies reported that the time spent 
on complying with the obligations resulting from the authorisation is higher (22%), the 

124 Estimations are based on the responses of large economic operators interviewed in the context of case 
studies. 

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same (18%) or smaller than the average Member State where they operate (9%). The 
majority of the sample could not answer this question. 

Efficiency 
The activities reported as being resource consuming include: 

  Tracking and tracing requirements are perceived as particularly cumbersome as 
they entail internal costs (design, development, implementation and handling of 
the tracking and tracing system by internal personnel) and external costs 
(purchase of hardware, development of software, handling costs of warehousing 
and distribution service providers and modification of manufacturing equipment 
to comply with the rules); 

  Complying with the provisions on fiscal markings management, monitoring and 

reporting; 

  Destroying obsolete goods and solving cases where goods got lost are viewed as 

costly activities. 

With respect to the first aspect, it should be noted that this might represent a major 
issue impinging on the efficiency for smaller operators. Larger businesses make use of 
Enterprise  Resource  Planning  (ERP), 
integrated  management 
applications, that allow for the monitoring of activities and for the easily extraction of 
the information needed for compiling reports for the tax administration. At least three 
manufacturers reported using such a system and claimed they would use it regardless 
of  legislation,  as  it  is  a  fundamental  tool  for  (internal)  management.  Once  the 
infrastructure is in place, reporting and notification to tax administration can be easily 
arranged.  

i.e.  suites  of 

It  should  be  noted  that  the  design  of  some  aspects  of  ERP  systems  is  linked  to  the 
requirements  set  out  in  the  relevant  excise  duty  law,  thus  major  changes  in  the 
legislation would translate into significant (transitional) costs due to the reengineering 
of the processes. 

Trade and logistics of tobacco products 

Activities 
Complying with the requirements for the movement of tobacco products  requires the 
economic operator to carry out a variety of activities, depending on the excise status 
of the good and the type of economic operator. 

European legislation requires all economic operators moving excise goods under duty 
suspension  arrangement  to  register  on  SEED-on-Europa.  This  is  usually  done  in 
parallel  with  the  registration  of  the  economic  operator  provided  the  business  entails 
dealing  in  duty  suspended  goods.  SEED  has  been  integrated  into  EMCS,  the  main 
platform  for  the  movement  of  duty-suspended  goods.  Each  time  a  new  movement  is 
created,  EMCS  automatically  cross-checks  the  data  on  the  economic  operators 
involved  before  validating  the  movement  and  creating  the  Administrative  Reference 
Code (ARC). 

Specifically,  the  activities  carried  out  by  an  economic  operator  dealing  in  duty-
suspended goods encompass:    

  Drafting the electronic administrative document by collecting all the necessary 

information; 

  Collecting the information for the creation of a record under ICS/ECS in case of 

trade with third countries; 

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  Establishing the guarantees before movement under suspension can begin; 

  Providing the person accompanying the excise goods with a printed version of 

the electronic administrative document; 

  Drafting a report of receipt of goods; 

  Keeping records of movements of excisable tobacco products in EMCS when 

products are moved to and from other Member States 

When products are moved within the national territory, they need not be registered in 
EMCS  if  the  economic  operator  benefits  from  a  simplified  procedure.  In  Denmark, 
Finland  and  the  UK,  such  arrangement  allows  for  the  e-AD  to  be  replaced  with  a 
consignment note or invoice containing a predefined set of information.   

In the case of raw tobacco, as already mentioned, provisions vary considerably across 
Member States. In Poland, raw tobacco must be packaged and sealed before moving it 
under  the  coverage  of  an  accompanying  document.  In  Denmark  and  Finland,  the 
system  is  paper-based,  even  though  in  Finland  the  issue  is  theoretical  as  no  cases 
exist.  Paper-based  systems  are  also  found  to  be  applied  in  the  case  of  tobacco 
products not explicitly defined in Directive 2011/64/EU, e.g. cigarette paper in Finland.   

Resources 
Based  on  the  data  collected  through  the  survey  to  economic  operators  reported  in 
Figure  55,  it  can  be  noted  that  81%  spend  32  hours  or  more  per  week  (60%  more 
than  40  hours)  on  tasks  associated  with  complying  with  the  current  rules  on 
monitoring the movements of excisable products. 

Figure 55 Time spent (man-hours) in order to comply (N=48) 

EMCS is not regarded as entailing any particular resource-intensive activity by 60% of 
the  respondents.  However,  this  has  been  shown  to  be  a  biased  estimate  of  the 
phenomenon, as it is driven by the responses of a cluster of operators belonging to a 
large transnational tobacco company. When the analysis is broken down to account for 
this fact, 90% of the respondents think that there are particularly resource consuming 
activities connected to the EMCS.  

Interviews with large businesses in case study countries confirmed that dimension is a 
major  discriminant  for  the  assessment  of  the  resources  spent  on  complying  with  the 
rules  on  the  movement  of  excise  goods.  Indeed,  the  costs  for  purchasing  and 

160 

0%10%20%30%40%50%60%70%Less than 2 man-hours/weekBetween 2 and 8man-hours/weekBetween 8 and 16man-hours/weekBetween 16 and24 man-hours/weekBetween 32 and40 man-hours/weekMore than 40hours/weekPlease give a rough estimation of the time being spent in order to perform activities associated with complying with the current rules on monitoring the movements of excisable tobacco products for your organisation? 
 
 
 
 
 
 
 
 
 
 
 
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operating technological equipment were estimated to range between EUR 30 000 and 
EU 50 000 for the initial investment and EUR 5 000 up to EUR 250 000 for operating 
and  maintaining  the  systems  (on  a  yearly  basis).  This  would  entail  a  considerable 
effort for smaller entities.  

A  costing  exercise  could  only  be  performed  for  larger  enterprises  which  agreed  on 
sharing  this  information  with  the  evaluator.  On  average,  creating,  managing  and 
confirming a movement under EMCS takes between 5 and 15 minutes. The figure does 
not change with the number of movements, indeed the same numbers were reported 
by operators moving very different volumes of products (ranging from 45 to over 1000 
a month). Such level of efficiency is usually achieved through the use of ERP software 
applications (e.g. SAP) which are able to generate system files directly uploaded in the 
customs system (EMCS or ECS/ICS for movement to/from third countries). 

While precise  figures cannot be provided for  smaller companies,  suffice it to say that 
when  lacking  dedicated  software  tools  that  allow  for  a  great  level  of  automation, 
economic  operators  need  to  create  EMCS  records  through  web-based  portals  made 
available  by  tax  administrations.  While  some,  such  as  the  one  provided  in  the  UK, 
allows  for  some  information  to  be  prepopulated,  in  general  they  entail  manual  entry 
thus result in a high absorption of resources.  

Efficiency 
Larger  economic  operators  do  not  highlight  any  significant  burden  coming  from  the 
provisions  on  the  movement  of  excise  goods  under  duty  suspension  arrangement; 
indeed  ERP  systems  can  be  integrated  with  EMCS  and  other  customs  systems  to 
achieve high level of automation, efficiency and to reduce errors. 

However, 40% of the surveyed economic operators do consider certain aspects to be 
resource-intensive. These include: 

  Drafting of the electronic administrative document and of the reports of receipt 

of goods; 

  Establishing guarantees before movement under suspension; 

  Dealing with fall-back procedures and maintenance shutdowns; 

  Managing trade with third countries which requires double entries under EMCS 

and ICS/ECS. 

The issue of establishing guarantees is reported to increase costs. This is mainly due 
to the fact that transportation companies are reluctant to take the risk of transporting 
the tobacco goods and provisions on liability vary significantly across countries (e.g. in 
DE the insurance companies can only make reduced recourse claim regarding excises 
against the transportation companies). Furthermore, it is mentioned as an issue, that 
in the case  of theft, an insurance claim for the lost excise duty must  be made in the 
Member  State  where  the  theft  took  place.  However,  it  is  not  always  known  whether 
the  theft  happened  in  one  Member  State  or  another.  Both  examples  are  reported  to 
create legal uncertainty and potentially lead to reduced efficiency.  

The  fact  that  ECS  and  EMCS  are  not  linked  has  been  pointed  out  by  several 
respondents  as  leading  to  increased  compliance  costs  as  the  operator  needs  to 
perform similar steps twice. According to some operators, this creates an obstacle to 
the  movement  of  products  which  are  considered  excisable  in  one  Member  State  and 
not  excisable  in  others.  Evan  when  operators  have  own  platforms  integrated  with 
EMCS  and  ECS,  IT  costs  are  still  higher  as  different  integration  modules  are  needed. 

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Moreover, when a failure occurs, it is not easy to find who is responsible for fixing it: 
this creates additional costs.  

Finally, EMCS is reported to be the third most  time-consuming activity in the current 
excise  duty  legislation  and  would  need  a  more  user-friendly  guidance.  In  regard  to 
this,  it  has  been  pointed  out  that  upgrades  to  EMCS  should  be  better  coordinated 
across  Member  State  to  minimize  costs  related  to  adapting  to  the  new  technical 
features.  However,  based  on  to  the  results  of  the  survey,  economic  operators 
advocated for a continuous and timely update of the technical specifications of EMCS 
to  keep  pace  with  changes  in  the  explanatory  notes  (e.g.  natural  wrapped  cigarillos) 
which  are  immediately  effective.  Indeed,  as  the  EMCS  in  some  Member  States  can 
only be used for predetermined CN codes, a delayed adjustment of the system would 
create  problems  in  terms  of  planning  the  production  and  the  launch  of  products,  i.e. 
would increase the administrative costs borne by the operators.   

Definitions and classification 

Activities 
Classification of tobacco products may be conducted: 

  Once, upon introduction (production/import) of a new product in the market; 

  Periodically, to adapt to modifications of the relevant provisions. 

In  the  first  case,  economic  operators  are  required  to  provide  a  pre-defined  set  of 
information on the product to the tax administration before the product is launched. 
This  is  the  case,  among  others,  of  Romania,  where  the  classification  of  the  products 
the operator will deal in is made at the time when the request for the authorisation is 
submitted.  In  this  case,  the  tax  administration  is  provided  with  the  description  (and 
samples if needed) of the product and a proposed classification which can be accepted 
or rejected. The classification is not repeated unless the product changes.  

In  other  instances,  such  as  in  Greece,  the  classification  is  performed  every  time 
some features of the tobacco product change. In this case the economic operator 
before  introducing  the  product  in  the  market,  would  need  to  liaise  with  the  customs 
authority  and  the  tax  administration  to  obtain  confirmation  of  the  proposed  CN  code 
and  tax  type  code  (the  latter  consistent  with  the  categories  set  out  in  Directive 
2011/64/EU). In case it is only the price  that changes, there is no need to submit all 
the information again.  

The  obligation  to  notify  tax  administration  does  not  exist  in  all  countries.  However, 
liaising with the tax administration at an early stage of the development of a product 
is common practice at least for larger operators. 

In countries where tobacco products are mainly imported (e.g.  Finland), the activities 
to be performed for classifying them are rather limited as both the CN and the excise 
code are included in the customs declaration. In the case of  Finland, larger economic 
operators trade with affiliated companies in other Member States thus classification is 
easier and it is considered a standard procedure.   

Laboratory  testing  of  products  is  seldom  conducted  by  tax  authorities  and  mainly 
concerns  products  imported  from  third  countries.  In  cases  where  the  classification  is 
particularly difficult, the economic operator can ask the national authority to request a 
Binding Tariff Information (BTI). 

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Resources 
Resources  spent  on  classification  vary  across  countries  and  typology  of  products. 
Based  on  the  information  collected  from  economic  operators,  the  time  employed  for 
classifying  a  “typical”  product,  i.e.  a  product  that  does  not  pose  particular  problems, 
ranges between 2 and 8 hours. The total burden is depends on: 

  Whether  classification  must  be  repeated  periodically  (e.g.  annually,  each  time 
the price changes, etc.) such as in EL and FI or if it is a one-off procedure; 
  The size of the businesses in terms of number of Stock Keeping Units (SKU).125 

In  the  case  of  more  complicated  cases  where  there  arises  a  dispute  between  the 
economic operator and the tax administration, time and resources dedicated to solving 
this  problem  would  increase  as  a  consequence  of  initiating  a  court  or  administrative 
case.  

Resources spent for classification in FI 

A new SKU for excise purposes involves the product to be classified and product basic data 
to  be  set  up  into  ERP  and  EMCS.  Annually,  all  SKUs  are  reassessed/undergo  changes  as 
this  task  has  to  be  carried  out  every  time  prices  changes,  the  tax  form  changes  or  the 
design  requirements  change  (this  change,  however,  does  not  involve  all  SKUs,  as  not 
concerning all brands). 

The  classification  process,  excluding  testing,  was  estimated  to  take  2  hours  for 
excise/customs category in a typical case, i.e. not posing particular problems, and 4 hours 
for more complicated ones (e.g. Make Your Own, MYO). Estimating an hourly cost of EUR 
27.35 this would amount to: 

  Typical case: EUR 27.35*2 hrs= EUR 54.7 

  Complicated case: EUR 27.35*4 hrs= EUR 109.4  

Efficiency 
As pointed out in Q.2.2, there are two main reasons for a dispute to rise. Firstly, the 
wording of the existing definition might open the way to subjective interpretations. 
This  increases  the  odds  of  a  disagreement  between  the  tax  administration  and  the 
operator to occur. At the same time, when taking a cross-country perspective, it might 
be the case that the same product is treated in different manners in different Member 
States.  Secondly,  existing  definitions  might  not  be  able  to  keep  up  with  the 
developments  in  the  market,  thus  it  can  be  questioned  whether  certain  products 
fall within the scope of Directive 2011/64/EU, e.g. whole tobacco leaves being sold to 
final  consumers.  On  both  cases  legal  uncertainty  on  the  treatment  of  the  product 
would follow. 

According to the results of the survey, 74% of the respondents experienced some kind 
of  disputes  between  their  company  and  the  tax  authorities.  When  excluding  the 
business affiliated to a large transnational tobacco company, the figure drops to 37%. 
The  legal  uncertainty  relating  to  the  classification  of  excisable  products  is  considered 
to  lead  to  an increase  in  administrative  costs  by  the  majority  of  economic  operators. 
In  general,  86%  of  them  consider  the  increase  to  be  very  high,  6%  to  be  high,  and 

125 A SKU is a distinct item as classified for inventory management purposes. Each SKU corresponds to a set 
of attributes (e.g. product description, material, size, colour, packaging) associated with the item and that 
distinguish it from all other items. Such classification helps tracking amounts of product in inventory, and/or 
units of billable entities sold. 

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only 9% consider the increases to be low. None of the respondents say that the legal 
uncertainty  did  not  have  an  effect  at  all.  These  figures  shall  be  interpreted  with  the 
due  care  as  replies  from  the  businesses  affiliated  to  the  same  transnational  tobacco 
company are likely to drive the results.  

In  general,  companies  struggled  to  quantify  the  resources  dedicated  to  classification 
as  this  is  seen  as  an  integral  part  of  operating  in  an  excise  business.  This  would 
suggest  that  costs  are  negligible.  Anecdotal  evidence  suggests  that  liaising  with  the 
tax  administration  at  an  early  stage  of  the  development  of  a  new  product  is  the 
strategy adopted by larger operators to minimize the legal uncertainty related to the 
excise treatment of the product. This is the case, among other of Expanded Shredded 
Stems  (ESS)126  which  is  treated  as  not  excisable  in  FR  and  excisable  in  UK:  the 
economic  operator  contacted  the  administration  as  it  was  unsure  about  the 
classification of the product. The administration rejected the proposed classification as 
tobacco refuse and the issue was sorted out within 3-4 days with virtually no costs. A 
similar  case  was  raised  in  DK  where  the  economic  operator  spontaneously  contacted 
the administration to verify the correct classification of water-pipe tobacco: this took a 
couple of hours of time. 

Even though at a system level this may not appear to be a widespread phenomenon, 
the  costs  associated  with  a  single  dispute  can  be  high  from  the  perspective  of  the 
single  economic  operator.  Indeed,  not  only  are  there  direct  costs  (e.g.  costs  of 
obtaining  legal  and  technical  assistance)  but  also  indirect  costs  in  the  form  of 
administrative proceedings, disruption in the supply of products, delays in new product 
launch, 
reduced 
capacity/impossibility to recover the costs of the initial investment), as well as unfair 
competition  as  a  result  of  companies  exploiting  the  existing  loopholes  in  some 
markets. The green box below reports one example of a dispute between an economic 
operator and a tax administration.  

revenues 

advisors, 

foregone 

external 

costs 

(i.e. 

for 

Disputes about definitions mainly concern certain types of products such as natural 
wrapped cigarillos with filter (e.g. Silverado in BE), filter rods with a section containing 
tobacco, tobacco sticks (e.g. Gullivers in LV, PL, SK, CZ), e-cigarettes, tobacco leaves 
(e.g.  in  IT,  UK,  PL,  SE).  Regarding  natural  wrapped  cigarillos  with  filter,  the  dispute 
was  often  centred  on  whether  this  product  should  be  classified  as  a  cigarillo  or  as  a 
cigarette  (cigarillo had an  outer  wrapper  covering  the  tobacco  rod  but  not  the  filter). 
Based  on  the  information  of  the  survey,  many  of  these  cases  above  are  still  pending 
before courts and/or have been partially resolved.  

126 Expanded shredded tobacco stems (ESS) are rolled, flattened, and shredded tobacco leaf stems that are 
expanded by being soaked in water and rapidly heated. They are used in the manufacture of cigarettes to 
increase the tobacco blend filling capacity. 

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The case of reconstituted tobacco in Romania 

Reconstituted tobacco 
Reconstituted  tobacco,  also  known  as  "recon,"  "foil"  or  "sheet"  tobacco        is  an 
ingredient employed in the manufacturing of tobacco products for:  

  Blend construction, in combination with other tobacco leaf, to produce the filler 

for cigarette, cigar, smoking tobacco and pipe; 

  Production of wrapper and binder for machine made cigars. 

Reconstituted tobacco is produced from the remnants of virgin tobacco generated from 
previous processes (e.g. Threshing Line, Primary production and Make & Pack). These 
by products are collected and manufactured into sheets. 

The case 
An economic operator based in Romania is currently facing problems with respect to its 
operations involving the treatment of reconstituted tobacco (CN code 2403 91 00). 

The  economic  operator  argues  that  this  product  should  not  be  excisable,  as  requires 
further  industrial  processing  before  it  can  be  smoked.  This  is  consistent  with  the 
treatment to which is subject in the country of dispatch (FR) where it is considered as 
raw tobacco.  

The  Romanian  authorities  considered  the  product  to  be  excisable  under  the  “other 
smoking  tobacco”  category,  as  in  their  opinion,  it  can  be  smoked  without  further 
industrial processing. 

The consequences 
At the moment, there are no significant  consequences of this dispute, as the  product 
arrives  under  a  customs  suspension  regime,  and  therefore,  with  a  simple  customs 
declaration  the  economic  operator  is  able  to  receive  the  product  without  interfering 
with its treatment as an excisable tobacco product. 

If  the  product  did  not  come  under  a  customs  suspension  regime,  the  economic 
operator  would  NOT  be  able  to  legally  import  the  product,  as  the  country  of  origin 
would not be able to ship it under the EMCS, therefore, the operator would be liable for 
excise  duty.  Considering  that  the  operator  imported  1.4  tonnes  of  reconstituted 
tobacco in 2013, this would amount to an exposure worth EUR 113 400. 

In  addition  to  the  exposure,  legal  costs  of  EUR  3  000  and  10-30  internal  man/days 
were spent on trying to clarify this dispute which is at present still open.  

Dual coding  

Activities 
Activities performed by economic operators for complying with the requirements of the 
legislation  in  terms  of  classification  of  tobacco  products  for  customs  and  excise 
purposes  are  inherently  related  to  those  performed  when  moving  such  goods.  Thus 
economic operators would usually: 

  Support the tax and customs administrations’ work by either providing a 
proposed classification or by providing the necessary documentation; 

  Enter the excise duty as well as the CN codes when creating an entry in EMCS.  

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Resources 
It  has  not  been  possible  to  estimate  the  costs  related  to  dual  classification  as  the 
procedures  are  overlapping  with  those  undertaken  for  complying  with  the  provisions 
for the classification for excise purposes, as explained in the previous section. Indeed, 
the  same  supporting  documentation  and  activities  (e.g.  lab  tests)  are  used  for  both 
classifications.  

Efficiency 
The application of differentiated definitions of tobacco products for excise duty and for 
customs  purposes  is  considered  to  be  problematic  among  the  surveyed  economic 
operators.  On  a  general  level,  68%  of  the  respondents  state  that  the  differentiated 
definitions result in a high increase of administrative costs, while 4% even think that 
the increase is very high. 67% of the respondents identified the double entries as the 
most  burdensome  activity  connected  to  the  differentiated  definitions.  21%  consider 
the  application  of  differentiated  definitions  to  have  no  effect  while  6%  states  that 
there  is  effect  to  a  low  extent.  Additional  testing  only  result  in  increased 
administrative costs for 6% of the respondents, while legal uncertainty caused by the 
inapplicability  of  the  customs  classification  for  excise  duty  purposes  results  in 
increased administrative costs in 10% of the cases.  

Similarly to the case of classification for excise purposes, inconsistencies between the 
specifications  of  the  two  coding  systems  have  the  potential  to  negatively  impact  on 
the  costs  structure  of  economic  operators  by  creating  legal  uncertainty127  over  the 
correct treatment of the product. This might be an issue for smaller operators. 

An example of a cigarillo dispute 

The matter of dispute 
In  the  view  of  the  economic  operator,  the  source  of  the  problem  is  that  there  exists  an 
inconsistency in the definition of cigars/cigarillos as laid down in the Explanatory Notes to 
the  CN  and  in  Article  4(1)  Directive  2011/64/EU.  The  matter  of  dispute  is  whether  the 
filter must be covered by the wrapper. 

The consequences 
The economic operator’s proposed classification was challenged by the tax administration 
and a BTI request was formulated. The manufacturer employed a large number of people 
for the preparation of the case (including sending sample to the customs laboratories) for 
a total of 9 days. 

Indirect costs related to this procedure include the delayed launch of the product and the 
distortion of the production plan. 

The entire process took 2 months and the BTI ruled in favour of the operator subject to a 
change in the of the product’s characteristics. 

These  results  are  not  fully  consistent  with  the  evidence  collected  in  the  case  study 
countries  where  none  of  the  economic  operators  interviewed  reported  experiencing 
problems  linked  to  the  simultaneous  existence  of  two  coding  systems.  A  possible 
explanation  for  this  puzzle  is  that  interviewed  economic  operators  were  mainly  large 
enterprises  (often  affiliates  of  transnational  tobacco  companies)  which  use  advanced 
IT  platforms  which  make  the  process  of  dealing  with  EMCS  and  coding  automatic. 

127 For a detailed discussion of the legal uncertainty on efficiency please refer to the previous section. 

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Moreover,  by  virtue  of  their  belonging  to  the  same  group,  they  often  trade  with 
affiliate or established partners which are well aware of the correct classification of the 
traded goods and have aligned the processes to avoid any divergent interpretation.  

When taking a cross-national perspective, the majority of respondents think that there 
are  not  any  significant  differences  in  the  compliance  costs  across  Member  States 
where they operate. 

Summary 

Our  analysis  of  the  impacts  of  the  current  provisions  on  excise  duty  on  the  efficient 
working of economic operators provides the following key findings: 

  Pre-authorisation: no major inefficiencies stemming from the current provisions 
could be identified, also given the limited frequency with which this operation 
must be carried out;  

  Production/Holding/Storing: some activities were reported as being resource 
intensive including tracking and tracing requirements, management of fiscal 
marks and destruction of tobacco products;  

  Movement of tobacco products: it seems that the assessment of the impact of 
the current provisions related to the movement of tobacco products (mainly 
EMCS) on efficiency depends on the size of the business. Smaller business 
reported that fulfilling all the requirements is associated with time consuming 
activities which imping on their efficiency. On the other hand, larger economic 
operators succeeded in achieving high level of automation and efficiency by 
developing platforms that integrate with EMCS and ECS/ICS; 

  Definitions and classification: companies struggled to quantify the resources 

dedicated to classification as this is seen as an integral part of operating in an 
excise business. This seems to suggest that costs at the systemic level are 
negligible.  

  Costs associated with disputes caused by the classification of “borderline” 

products can be high, removing legal uncertainty with respect to the treatment 
of products whose classification requires subjective interpretation of the law 
would increase the efficiency of economic operators;  

  Dual coding: the application of differentiated definitions of tobacco products for 

excise duty and for customs purposes is considered to be problematic as it 
translates into double entries and legal uncertainty. Larger manufacturers on the 
contrary, did not report problems, the reason likely being that they use 
advanced IT platforms which make the process of dealing with EMCS and coding 
automatic. 

  One area of significant potential reduction of costs regards the compliance with 
the requirements of economic operators with excise stamp obligations, and in 
particular, with the rules regarding the proof of destruction in light of recovering 
excise duty due for products which became unfit for consumption or for tax 
stamps which were never applied to products.  

Overall conclusions  

The results from Q.4.1 and Q.4.2 are summarized in Table 24 below. By looking at all 
parties  involved,  it  seems  like  the  greatest  negative  impact  stems  from  the  current 
definitions  as  laid  down  in  Directive/2011/64  and  in  the  existence  of  inconsistencies 
between  them  and  the  Explanatory  Notes  to  the  CN.  In  both  cases  efficiency  is 
negatively affected by the increase in the operating costs. 

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The analysis shows that the primary driver is legal uncertainty over the treatment of a 
specific product. Even though the costs at a systemic level are (still) relatively small as 
disputed  cases  concern  niche  products,  the  impact  on  the  single  business/tax 
administration can be significant. In the case of tax administrations, resources need to 
be  spent  on  dealing  with  the  dispute,  thus  they  are  diverted  from  other  tasks.  From 
the perspective of the economic operator, the direct costs of preparing the case (e.g. 
legal  opinions)  add  up  to  more  indirect  costs  such  as  the  forgone  revenues  for  a 
delayed  launch  of  the  product,  financial  distress,  unfair  competition  just  to  name 
some. 

Table 24 Comparison of the effects of the current provisions on efficiency 

Tax administration 

Economic operator 

Negative effect 
on efficiency* 

Source 

Pre-
authorisation 
Production/ 
Holding/ 
Storing 

None 

None 

n/a 

n/a 

Trade and  
logistics 

None 

n/a 

Definitions and 
classification 

Moderate 

Dual coding 

Moderate 

Legal uncertainty 
leading to 
diversion of 
resources for 
investigations 
and court-cases 
Each product 
must be 
considered twice 

Legal uncertainty 
due to 
inconsistencies 
(small number of 
cases) 

* 4-point scale: None, Moderate, Medium, High 

Negative effect 
on efficiency 
None/Moderate 

n/a 

Source 

Moderate  

Limited (large 
enterprises) 

High (small 
enterprises) 

Moderate (at 
systemic level) 

High (for 
disputed cases) 

Moderate (at 
systemic level) 

High (for 
disputed cases) 

Setting up and 
operating 
systems for 
record keeping 

Fiscal marking 
Guarantees 

Creating records 
on 
EMCS/ECS/ICS 
manually 
Legal uncertainty 
leading to court-
case, admin 
ruling, etc. 

Legal uncertainty 
leading to court-
case, admin 
ruling, etc. 

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Recommendations 
The recommendations are addressed solely to the Commission or regard measures to 
be taken at EU level. The recommendations are “positive” which means, they take into 
account actions that should be taken or should be considered for further analysis.  

There are a number of measures which can be taken at national level. Meanwhile, as it 
was  not  within  the  remit  of  this  evaluation  to  assess  national  choices  or  systems, 
recommendations for Member States  are not systematically collected for the purpose 
of presentation in this chapter. 

With  the  view  of 
facilitating  reading  and  allow  a  suitable  overview,  the 
recommendations  presented  in  this  chapter  have  been  structured  around  the  main 
topics  evaluated.  The  expected  impact  on  the  objectives  pursued  by  the  Directive  is 
included in the presentation.  

The  “revenue  impact”  regards  the  “direct”  expected  impact  on  the  budgetary 
objectives of Member States 

“Monitoring  and  controlling”  regards  the  ability  of  Member  States  to  monitor  and 
control the logistics (production, movement and release for consumption) of excisable 
tobacco products. 

“Reduction  of  costs”  regards  the  aggregate  impact  of  the  recommendations  on  the 
administrative  costs  for  Member  States  administrations,  compliance  costs  for 
economic  operators,  taking  into  account,  where  relevant,  the  potential  one-off-costs 
expected. 

Definitions of excisable tobacco products 
The  revision  of  Art  2-5  of  Directive  2011/64/EU,  which  define  excisable  tobacco 
products  has  the  potential  to  bring  significant  improvements  to  the  effectiveness 
(safeguarding  budgetary  interest  of  Member  States  and  improving  the  ability  of 
Member  States  to  control  the  logistics  and  monitoring  of  excisable  tobacco  products) 
as well as the efficiency of the tax collection system. 

In light of the increasing use of e-cigarettes as an alternative to tobacco cigarettes,128 
it is assessed that the non-inclusion of this type of product in the common framework 
of excisable tobacco products will have a significant negative impact on the budgetary 
revenues  of  Member  States.  Moreover,  as  Member  States  are  taking  different 
approaches  in  regulating  the  treatment  and  taxation  of  this  product,  the  landscape 
may become fragmented, negatively impacting the functioning of the internal market. 
As  a  result,  this  evaluation  recommends  the  Commission  to  investigate  further  the 
possibility  of  including  e-cigarettes  within  the  scope  of  the  harmonised  system  of 
excise duty on tobacco products. It is expected that such a measure will impose some 
administrative  costs  on  Member  States  (as  a  one  off  cost  of  setting  up  the  system) 
and compliance costs on the operators involved. 

As  thoroughly  presented  in  Q2,  Member  States  believe  that  systematic,  real-time 
information on  raw tobacco will greatly improve their ability to monitor the logistics 
of excisable tobacco products and fight illicit trade. The current systems, however, are 
inappropriate to generate the necessary data. As the issue is of growing concern to a 

128 See Appendix 6 – Research note on e-cigarettes for a detailed analysis 

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number  of  Member  States,  different  types  of  systems  for  monitoring  and  control  of 
raw  tobacco  are  being  implemented  at  national  level.  However,  as  they  differ  in 
scope129  and  obligations,130  they  will  be  inappropriate  for  generating  comparable  real 
time  data  which  can  be  integrated  in  the  existing  systems.  Further  fragmentation  of 
approaches may also be detrimental to the internal market. As a result, this evaluation 
considers  that  steps  at  EU  level  to  establish  a harmonised  system  for  monitoring  the 
control  and  logistics  of  raw  tobacco  are  necessary.  In  order  to  achieve  this,  it  is 
recommended that the Commission further analyses the possibility of introducing raw 
tobacco within the scope of monitoring of excisable tobacco products which will ensure 
that adequate data becomes available, in a systematic and comparable format across 
the territory of the EU. This recommendation, however, may imply significant costs for 
tax administrations131 as well as for the economic operators involved. For this reason, it 
is considered necessary for the aspect of cost to be adequately investigated and taken 
into account before deciding on further measures and/or alternative solutions (e.g. in 
the context of a Commission-led impact assessment process). 

In  order  to  reduce  the  legal  uncertainty  regarding  the  treatment  of  certain  tobacco 
products, reducing costs and inconsistent treatment across Member States, a number 
of  specific improvements are recommended. These include:  

  Bringing Art 4 (1) in line with its corresponding CN code;  

  Reducing uncertainty in relation to Art 5 (1) (a) by specifying that processing 

refers to processing in a tax warehouse;132 

  Revising Art 5 (1) (b) by removing the word “retail” from the text. 

Due to the fact that Art 5 (1) (a) represents a catch-all category, it’s main purpose is 
to enable the taxation of tobacco products that are not specifically defined in the other 
articles, this evaluation has found that this purpose is adequately fulfilled in the case 
of  water-pipe  tobacco.  The  composition  of  water-pipe-tobacco  contains  sugars, 
molasses  and  other  dense  substances,  its  properties  in  terms  of  weight  differs 
considerably from the other types of products which usually fall under the category of 
“other smoking tobacco” (e.g. pipe tobacco).  Depending on the nature of the market 
in a particular Member State, a particular rate structure for this category may not be 
appropriate  to  apply  to  both  water-pipe  tobacco  as  well  as  the  other  products  within 
“other  smoking  tobacco”.  Being  unable  to  find  an  appropriate  balance  between  the 
consumption patterns and the rate structure may have significant implications on the 
budgetary  revenues.  Applying  the  same  rate  to  water-pipe  tobacco  may  lead  to  (a) 
water-pipe tobacco being over taxed, pushing consumption towards the illicit market, 
or (b) other types of products in the category  being under-taxed, leading to potential 
revenue  losses  and  harmful  tax-induced  price  advantages.  As  a  result,  it  is 
recommended  that  water-pipe  tobacco  be  introduced  in  a  separate  tax  category, 
allowing  the  imposition  of  an  adequate  rate  in  relation  to  the  characteristics  of  the 
product. 

Additional  specific  recommendations  are  made 
classification and its corresponding CN codes and explanatory notes. These include: 

in  relation  to  the  Customs 

129 Different scope with respect to the object monitored (i.e different definitions of raw tobacco) as well as 
the subjects (i.e. the parties subject to obligations) 
130  E.g.  requiring  the  subjects  to  submit  different  information  at  different  moments  in  relation  to  the 
movement, dispatch or receipt in different modes (electronic, paper, etc.) 
131 E.g. setting up the legislative framework, increasing administrative capacity for control and verification, 
upgrading IT systems, etc. 
132 I.e. tobacco which can be smoked following any type of processing done outside of a tax warehouse is to 
be considered smoking tobacco. 

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  Creating a distinct CN code for expanded tobacco, thereby removing the legal 

uncertainty with respect to the tax treatment of this product, reducing costs for 
administrations and operators and improving the functioning of the EMCS 

  Further revising the CN classification to ensure that the same code does not 

contain both excisable and non-excisable tobacco products.  

Due to the fact that inconsistent treatment of a number of tobacco raw materials or 
by-products133  across  Member  States  takes  places  and  affects  the  effectiveness  and 
efficiency  of  the  tax  collection  system,  it  is  recommended  to  create  a  zero-rated  tax 
category  within  the  Directive  that  would  reference  specific  CN  codes  containing  such 
products ensuring an adequate and consistent monitoring across the EU. 

Finally,  the  subjective  criteria  of  Art  4  (1)  have  been  identified  to  be  an  important 
source of legal uncertainty and disputes which have resulted in high costs for Member 
States  and  economic  operators.  It  is  therefore  recommended  that  steps  be  taken 
towards  more  objective  criteria  for  classification.  This  recommendation  could  be 
achieved  by  describing  excise  categories  with  reference  to  the  CN  codes,  as  is  the 
current  practice  with  alcohol  and  mineral  oils.  As  described  in  Q.2.2  (a),  this  change 
would  officialise  already  existing  practices  and  would  help  streamline  processes  of 
importation and customs clearance. 

These recommendations are summarised in Table 25, below. 

Table 25  Summary of recommendations related to Definitions of excisable tobacco products 

Recommendation 

Further analyse the possibility of including e-cigarettes in 
the scope of excise duty on tobacco products 

Further analyse (with careful consideration to costs and 
burden involved) the possibility of introducing raw 
tobacco within the scope of monitoring of excisable 
tobacco products and/or alternative solutions to ensure 
the systematic monitoring of the logistics of raw tobacco. 

Revenue 
impact 

Monitorin
g and 
control 

Reduction 
of costs 

High 

n/a 

Negative 

Medium 

High 

Negative 

Art 4(1) (a) should be brought in line with the CNEN of 
2402 10 00 

n/a 

n/a 

Medium 

Art 5(1) (a) “ capable of being smoked without further 
industrial processing” to be revised in order to reduce 
uncertainty related to the treatment of partially processed 
tobacco put up for sale with the intention of being smoked 
(e.g. “without further processing in a tax warehouse) 

Medium 

Medium 

Medium 

In light of the different characteristics of water-pipe-
tobacco, a distinct tax category should be developed, 
allowing the imposition of an appropriate  rate structure 

Art 5(1) (b) “put up for retail sale and which can be 
smoked”, should be revised by removing wording “retail” 
from the definition, the CN code should be subsequently 
brought in line 

Medium / 
low 

Medium / 
low 

n/a 

n/a 

Medium 

Medium 

Further analyse the possibility to afford expanded tobacco 
a distinct CN code. 

In order to remove inconsistencies and legal uncertainty 
in treatment, further analyse the possibility to include an 

n/a 

n/a 

Medium 

High 

Medium 

Medium 

133 E.g. reconstituted tobacco; tobacco refuse not suitable for smoking, expanded tobacco 

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Recommendation 

Revenue 
impact 

Monitorin
g and 
control 

Reduction 
of costs 

additional tax category within the scope of the Directive 
which is to include intermediary products whose 
monitoring under the EMCS is necessary, this category 
may make reference direct reference to applicable CN 
codes (e.g. reconstituted tobacco; tobacco refuse not 
suitable for smoking, expanded tobacco, etc.) 

Aim to eliminate inconsistencies between CN codes and 
Excise duty categories, prioritising the need for non-
excisable products to share the same CN classification as 
excisable products and for products within the same tariff 
classification to be potentially classified in multiple excise 
categories 

 Art 4 (1) “given their properties and normal consumer 
expectations is exclusively intended to be smoked as it is” 
should be revised to ensure legal clarity and eliminate 
legal uncertainty and costly disputes 

n/a 

Medium 

Medium134 

Medium 

n/a 

High 

Rates and structure of Excise duty 
The  conclusions  and  findings  presented  in  Q2.1  (b)  show  that  the  difference  in  the 
level  of  taxation  between  cigars/cigarillos  and  cigarettes  may  create  an  incentive  for 
economic  operators  to  design  and  market  “borderline”  products  which  objectively 
fill  the  requirements  of  cigarillos/cigars  but  which  are  similar  in  a  number  of  ways 
(e.g. with respect to smoking time, production methods, unit price, etc.) to cigarettes. 
The resulting disputes lead to significant costs for both tax administrations as well as 
economic operators. Additionally, the quantitative analysis presented in section 2.1 (c) 
suggests  that  consumer  downgrading  from  cigarettes  to  cigars/cigarillos  is  taking 
place and that it has a sizable impact on the budgetary revenues of Member States. As 
a  result,  it  is  recommended  to  align  minimum  excise  duty  taxes  (i.e.  through  a 
mechanism  similar  to  the  MED  on  cigarettes135)  of  cigars/cigarillos  to  the  minimum 
excise  taxes  on  cigarettes.  In  order  to  eliminate  the  incentive  to  market  “borderline” 
products,  such  a  mechanism  does  not  need  to  go  beyond  the  objective  of  ensuring 
that the same minimum excise tax is levied per unit of cigar/cigarillo as the minimum 
excise  tax  levied  per  unit  of  cigarette.  This  recommendation  may  also  be  taken  up 
individually,  by  Member  States,  which,  under  the  existing  arrangements  can  apply  a 
minimum  tax  floor136  on  cigars/cigarillos  when  using  an  ad  valorem  or  mixed  tax 
structure.  

Finally,  as  substantiated  by  Q3.1,  the  nature  of  the  MED137  and  the  applicable  rules 
regarding its use do not seem to be clear, despite the Commission having answered a 
request  for  clarification.  As  such,  there  is  evidence  of  non-compliance  with  the  rules 
concerning  the  level  at  which  the  MED  on  cigarettes  may  be  set.  Therefore,  this 
evaluation  recommends  that  the  Commission  revises  the  rules  surrounding  the  MED 
on  cigarettes  to  provide  sufficient  legal  clarity  with  respect  to  the  upper  and  lower 
limits at which it may be set. 

134 Although on an operational level, this will remove legal uncertainty on the long term, the one off costs to 
both administrations and operators associated with changes of CN classification may be considerable (hence 
the effect on costs requires further investigation) 
135 The MED is allowed by Art 7(4) and 8 (6) of Directive 2011/64/EU 
136 Art 14. Directive 2011/64/EU 
137 Art 7 (4) and Art 8(6)) 

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The  two  recommendations  related  to  the  rate  and  tax  structure  are  summarised  in 
Table  26,  Summary  of  recommendations  related  to  rates  and  structure  of  the  excise 
duty. 

Table 26, Summary of recommendations related to rates and structure of the excise duty 

Recommendation 

Consider the possibility of aligning minimum excise taxes on cigars / 
cigarillos with those of cigarettes in order to eliminate the incentive 
to market “borderline” products which might attempt to circumvent 
payment of the higher excise duty.  

Revenue 
impact 

Monitorin
g and 
control 

Reductio
n of costs 

Medium / 
High138 

n/a 

n/a 

Revise Art 7 (4) and Art 8 (6) to remove the uncertainty with 
respect to the limits imposed on the MED. (not prioritised) 

n/a 

n/a 

n/a 

Excise stamps and Track and Trace systems 
Article  39  of  Directive  2008/118/EC  provides  that  Member  States  may  require  that 
excisable  tobacco  products  carry  tax  markings  or  national  identification  marks 
used for fiscal purposes at the time when the products are released for consumption in 
their  territory.139  Member  States  are  free  to  decide  whether  and  to  which  excise 
products to apply such a system. The fiscal marks inter alia are proof that excise duty 
is paid and is therefore a mean to prevent illegal trade. 

Characteristics  of  fiscal  marks  differ  widely  across  Member  States  and  therefore  it  is 
not  possible  to  describe  a  “standard”  for  fiscal  marks  at  the  EU  level.  However,  an 
overall  distinction  can  be  made  between  fiscal  marks  according  to  their  features  and 
the  level  of  information  that  they  provide.  In  addition  to  the  information  and  tracing 
features, fiscal marks also contain some security features140. 

The features of the fiscal marks imply different possibilities to tracing the products and 
combating illicit trade.  The information contained in a fiscal mark and/or those made 
available by T&T systems is (or has the potential to be) used for combating illicit trade 
however the degree of complementarity/substitution of the two systems varies across 
Member  States.  Also,  opinions  on  the  potential  development  for  T&T  systems  differ 
across the EU. 

In light of the evidence collected and presented in the context of this evaluation,141 the 
complete  substitution  of  excise  stamps  by  track  and  trace  systems  is  not 
recommended at this moment.  

The measurement of administrative and compliance cost conducted has revealed  that 
the  management  of  excise  stamps  imposes  significant  operating  costs  for  economic 
operators. As a result of this, the development of the track and trace systems should 
continue  to  be  within  the  focus  of  the  EU  Commission  and  Member  States.  A  future 
phasing  out  of  excise  stamps,  when  the  capabilities  and  features  of  the  systems  will 
be, at minimum, on par with the expectations of the Member States in terms of their 
monitoring, control and authentication functions, could be considered.  

138 Given the measure does not have unintended consequences on illicit trade 
139 Art. 39 (1) in Council directive 2008/118/EC of 16 December 2008 
140 Examples include: watermarks, holograms, background aura, micro-text, temperature sensitive ink used 
on parts of the fiscal mark, design/ colour of the fiscal marks 
141 As detailed in Appendix 5 – Question 1: Background Information, and specifically in Q1.2 

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Other  
Finally, Table 27 summarises a number of minor recommendations which are seen to 
bring marginal improvements to the overall system of tax collection in Member States. 
While  they  are  expected  to  be  beneficial,  due  to  their  relatively  lower  expected 
impacts, they should be sought in as far as resources are available to implement them 
and can be given a lower priority than the recommendations presented in the sections 
above. 

Table 27, Summary of recommendations related to other topics analysed in the context of this evaluation  

Recommendation 

A correction message for the e-AD should be introduced in order 
to correct minor mistakes; however, it should not be possible to 
change essential data like the quantity, the EPC, the CN-code, 
etc. (not prioritised) 

Consider integrating national EMCS systems in the context of 
market surveillance and for the purposes of criminal 
investigations (not prioritised) 

Transit countries should electronically informed of movements 
taking place on their territory  (not prioritised) 

Consider developing and recommending a uniform risk analysis 
tool to be used at EU level (not prioritised) 

Revenue 
impact 

Monitorin
g and 
control 

Reduction 
of costs 

n/a 

low 

Low 

n/a 

Medium 

Medium 
/Low142 

n/a 

n/a 

Medium 

Negative 

Medium 

Negative 

142 May entail one-off costs which Member States might be reluctant to invest, especially in the context of 
having recently finished the development and implementation of the EMCS. 

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Appendix 1 – Evaluation Matrix and Evaluation Design 

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Appendix 2 – Questionnaire to Member States 

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Appendix 3 – Survey Questionnaire to Economic Operators 

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Appendix 4 – Analysis of survey data from economic 
operators 

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Appendix 5 – Question 1: Background Information 
The  first  question  proposed  is  fundamentally  descriptive.  The  objective  is  to  provide 
the Commission and the evaluator with an overview of the excise duty system in the 
different  Member  States.  At  the  same  time,  it  helps  contextualising  the  issues 
discussed  in  the  other  sections  of  the  report,  thus  to  draw  a  baseline  for  further 
considerations. 

Q.1.1 What is the structure of the excise duty applied in each Member State, 
inclusive of the minimum excise duty? 

Questions 

Indicators / Descriptors 

Data sources 

Q.1.1 What is the structure of the excise 
duty applied in each Member State, 
inclusive of the minimum excise duty143 

Structure of excise duty in each 
MS for cigarettes and 
cigars/cigarillos: 

Desk research EE (DG 
TAXUD,  

Excise Duty Tables) 

  Specific 

  Ad valorem (at WAP) 

  MED (if applies) 

As  briefly  mentioned  in  a  previous  section,  Directive  2011/64/EU  distinguishes 
between four different types of tobacco products: cigarettes, cigars/cigarillos, fine-cut 
tobacco  for  the  rolling  of  cigarettes  and  other  smoking  tobacco.  Nevertheless,  the 
provisions  on  the  structure  and  the  limits  applicable  to  excise  duty  can  be  classified 
into two groups: cigarettes and tobacco products other than cigarettes. 

Cigarettes 
After providing the definition of cigarettes in Article 3, Directive 2011/64/EU lays down 
the provisions applicable to this product category  in terms of excise duty structure in 
Articles 7 to 12.  

According  to  the  wording  of  these  articles,  Member  States  are  requested  to  apply  a 
mixed tax structure on cigarettes including (i) a specific component calculated and (ii) 
an ad valorem component. While the former is calculated as a fixed monetary amount 
per unit of product, the latter is a proportional component based on the retail selling 
price. The illustration below shows how a mixed structure works. The horizontal dotted 
red line represents the specific component of the overall excise duty and it is defined 
as  a  fixed  amount  per  quantity  of  cigarettes:  EU  legislation  uses  1,000  units  as  the 
reference  point.  The  red  sloped  line  represents  the  ad  valorem  component  which, 
according  to  the  definition  provided  in  the  Directive,  is  “calculated  on  the  maximum 
retail  selling  price,  including  customs  duties”.144  An  example  is  provided  in  the  graph 
for cigarettes priced at X, where the two components are considered separately. As it 
can  be  seen,  the  overall  excise  duty  burden  results  from  the  vertical  sum  of  the 
horizontal and the sloped lines. 

143 Art 7 (4) and Art 8 (6) of Directive 2011/64/EU 
144 Article 7 (1) of Council Directive 2011/64/EU 

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The  figure  above,  based  on  the  most  recent  release  of  the  Excise  Duty  Tables 145, 
illustrates  the  situation  in  different  Member  States.  Countries  can  be  clustered  into 
three  groups.  The  first  group  encompasses  all  countries  on  the  left-hand  side  of  the 
graph  where  the  structure  is  skewed  towards  the  specific  component.  In  the  second 
group, including all the countries between the Czech Republic and Cyprus, the relative 
weight  of  the  two  components  is  more  balanced.  Finally,  the  group  starting  with 
Hungary shows a preference for an ad valorem component.  

Figure 56, Excise duty structure: specific and ad valorem component as % of WAP calculated at WAP 

The specific component 

In  addition  to  prescribing  a  mixed  tax  structure,  the  provisions  on  cigarettes  define 
limits  on  the  relative  weight  of  the  two  components.  According  to  Article  8(3)  the 
specific  components  shall  not  be  less  than  7.5%146  and  not  more  than  76.5%  of  the 

145  European  Commission,  DG  Taxation  and  Customs  Union,  2014,  Excise  Duty  Tables.  Part  III- 
Manufactured Tobacco. Situation as of 1 January 2014. 
146 Until 1 January 2014 the lower limit was set at 5% of the WAP. 

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amount of the total tax burden resulting from the aggregation of the specific duty, the 
ad valorem duty and the VAT, the latter two calculated at the weighted average retail 
selling price (WAP). The illustration below summarizes the situation and shows that in 
order  for  a  country  to  be  compliant  with  the  provisions,  the  specific component  shall 
lay within the shaded area whose lower and upper limits  of which are calculated as a 
share of the total tax burden (including VAT) at the WAP. 

Figure 57 The limits on the specific excise duty component 

Data  reported  in  the  Excise  Duty  Tables,  show  that  in  all  countries  the  specific 
component falls within the range defined. This can be seen in Figure 58 where the red 
horizontal  lines  represent  the  limits  set  out  in  Article  8.  The  situation  varies  across 
countries  with  some  falling  short  of  the  recently  raised  lower  limit  (e.g.  Italy)  and 
others  almost  hitting  the  ceiling  (e.g.  Denmark,  Sweden).  An  interesting  case  is 
represented  by  the  Netherlands,  where  the  specific  component  represents  exactly 
76.5% of the total tax burden (including VAT). 

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Figure 58 The specific component and the provisions of Article 8(3) 

The minimum excise duty (MED) 

Article  8(6)  provides  that  Member  States  may  levy  a  minimum  excise  duty  on 
cigarettes. When applied, this serves, in effect, as a minimum floor for the taxation of 
cigarettes. The illustration below shows that the effect of the imposition of the MED147 
would be to raise the minimum taxation on cheaper brands such that all the products 
lying on the left of X would be taxed at the level of the MED, while all the others would 
be  subject  to  the  mixed  tax  structure  featuring  the  specific  and  ad  valorem 
components. 

Figure 59 Excise duty structure with the MED 

147 Here the MED is assumed as a specific component defined as a fixed amount per unit of the product. 

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All  but  four  countries  (UK,  DK,148  SE  and  DE)  apply  a  MED  as  of  1  January  2014  with 
values ranging from EUR 275.62 (per 1,000 items) in IE to EUR 70.76 in LT. As shown 
in Figure 60, there is no straightforward relationship between the specific component 
and  the  MED  such  that,  for  instance,  countries  with  high  a  specific  component  also 
charge a high MED. Finland, Italy and Belgium are such examples of countries with a 
low specific component and a relatively high MED. 

Figure 60 Excise duty structure: Specific component and MED 

An  interesting  case  worth  exploring  is  represented  by  Germany  where,  according  to 
the  information  reported  in  the  Excise  Duty  Tables  for  Manufactured  Tobacco,149  a 
dynamic total tax is in place. This is calculated as a fixed monetary amount per item 
(currently EUR 0.19259) minus the VAT. This represents an exception in the European 
landscape. 

The  effect  of  the  introduction  of  a  MED  has  been  shown  above.  From  the  wording  of 
the Directive it is not clear whether this should be treated as a specific component, i.e. 
if  it  should  comply  with  the  requirements  set  out  in  Article  8(3).  As  explained  in 
greater  detail  in  Question  3.1,  our  calculations  show  that  the  majority  of  Member 
States  slightly  exceeded  the  upper  limit  of  the  allowable  range  for  the  specific 
component as a percentage of the total tax burden.   However, it must be noted that 
the  WAP  is  calculated  using  data  on  the  releases  for  consumption  made  in  the 
preceding calendar year.  

The overall excise duty burden 

Article 10 of Directive 2011/64/EU mandates that the overall excise duty, inclusive of 
the  specific  and  the  ad  valorem  component  (excluding  VAT),  shall  represent  at  least 
60%  of  the  WAP.150  An  illustration  is  provided  below.  The  same  article  provides  two 

148 Denmark applied an MED until July 2013. 
149  European  Commission,  DG  Taxation  and  Customs  Union,  2014,  Excise  Duty  Tables.  Part  III- 
Manufactured Tobacco. Released on 1 July 2013. 
150 Until 1 January 2014 the limit was set at respectively 57% of the WAP. 

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additional rules (which have been omitted in the graph for the sake of clarity), namely 
that  the  overall  excise  burden  shall  never  be  less  than  EUR  90  per  1 000  cigarettes 
regardless  of  the  WAP,  and  that  the  60%  rule  does  not  apply  whenever  a  country 
levies an excise duty of at least EUR 115 per 1 000 cigarettes at the WAP.151  

Figure 61 The provision on the overall excise duty 

Figure 62, below depicts the situation in the different Member States as of 1 January 
2014. All the countries for which the dark blue bar is lower than the horizontal red line 
are  currently  not  compliant  with  the  provisions  of  the  Directive.  The  main  reason  for 
this  misalignment  lies  in  the  recent  change  in  the  minimum  thresholds.  If  one  takes 
the  level in  place  until 31  December  2013,  i.e.  EUR  64  per  1 000 items,  all  countries 
were compliant. At the same time, as the WAP is calculated by DG TAXUD using data 
on the releases for consumption made in the preceding calendar year, the observation 
of minor non-compliance may simply reflect some inaccuracy in the estimated WAP for 
the  relevant  calendar  year  rather  than,  of  necessity,  a  failure  in  Member  State 
compliance. 

151 Until 1 January 2014 the two limits were set at respectively EUR 64 and EUR 101 per 1,000 items. 

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Figure 62  Overall excise duty as a share of the WAP, calculation at WAP 

Manufactured tobacco other than cigarettes 
A  second  set  of  provisions  encompassing  Articles  13  and  14  engage  with  tobacco 
products  other  than  cigarettes.  Differently  from  the  case  discussed  above,  Member 
States  are  not  required  to  apply  a  mixed  excise  duty  structure,  in  fact  while  this 
remains an option a purely ad valorem or specific component system are also possible. 
Similarly  to  the  case  of  cigarettes,  the  ad  valorem  component  is  calculated  on  the 
basis  of  the  maximum  retail  selling  price,  while  the  specific  component  can  be 
expressed as a fixed amount per kilogram or, in the case of cigars and cigarillos, for a 
given number of items.  

Cigars/Cigarillos 

In  the  case  of  cigars  and  cigarillos,  25152  countries  opted  for  a  pure  system  featuring 
either an ad valorem component (11) or a specific one (14). Only three counties (DE, 
DK and FR) have a mixed structure in place.  

The  specific  component  is  calculated  either  as  a  fixed  amount  per  kilogram  (e.g.  CY 
and LT) or per 1 000 items (e.g. BG, CZ, DE, DK, LV, MT, PL, SE, SK, RO, and HR). Its 
value ranges between EUR 14 (per 1 000 items) in DE and EUR 275.36 in the UK. As 
for the ad valorem component, rates are comprised between 1.47% in DE and 34% in 
EL  of  the  tax  included  retail  selling  price  (TIRSP).  The  information  is  summarized  in 
Figure 63 and Figure 64.  

The  MED  is  used  in  6  cases,  while  in  Germany  a  dynamic  total  tax  is  applied.  The 
latter is calculated, as in the case of cigarettes, as a fixed monetary amount per item 
(currently set at EUR 0.576) minus the VAT.  

152 Empty cells, “n/a”; “n.a.”; “-“; etc. In the Excise Duty Tables have been interpreted as ”0”.  

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Figure 63 Specific component for cigars/cigarillos, per 1,000 items (or kg in CY and LT) 

Figure 64 Ad valorem component for cigars/cigarillos, as % of TIRSP 

Fine-cut tobacco for rolling of cigarettes 

Fine-cut tobacco intended for the rolling of cigarettes is subject to: a mixed structure 
in  10  countries,  a  pure  ad  valorem  structure  in  3  cases  (AT,  HU,  IT)  and  a  pure 
specific structure in 13 Member States.153 Compared to the case of cigars and cigarillos, 
it  should  be  noted  that  the  mixed  excise  duty  structure  is  opted  for  by  many  more 

153 The Excise duty tables do not report the information EE and EL. The previous version of the document 
showing the situation as at 1 July 2013 indicated that both EE and EL had a pure specific system in place. 

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countries  thus  bringing  the  treatment  of  fine-cut  tobacco  for  the  rolling  of  cigarettes 
closer to cigarettes as envisioned in the Directive.  

The specific component, calculated as a fixed amount per kilogram of product, ranges 
between  EUR 7.3 in LU per kilogram and EUR  252.22 per kilogram in IE.  The  rate of 
the ad valorem instead varies between 7.19% in NL and 58.5% in IT of the TIRSP. As 
many  as  11  countries  apply  a  MED,  in  addition  to  DE  where  the  dynamic  total  tax  is 
calculated as a fixed monetary amount per kilogram (currently EUR 91.63) minus the 
VAT. Figure 65 and Figure 66 illustrate the situation.  

Figure 65 Specific component for fine-cut tobacco intended for the rolling of cigarettes, EUR per kg 

Figure 66 Ad valorem component for fine-cut tobacco intended for the rolling of cigarettes, as % of TIRSP 

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Other smoking tobacco 

Finally,  for  products  classified  under  the  category  “other  smoking  tobacco”,  16 
countries use a pure specific structure, 6 only charge an ad valorem component, and 8 
use  a  mixed  structure.  In  8  instances  countries  apply  the  MED  to  other  smoking 
tobacco products. 

The  specific  component  ranges  between  EUR  7.30  per  kilogram  in  Luxembourg  and 
EUR 204.41 per kilogram in Sweden, while the ad valorem rate takes values between 
7.19% in NL and 56%154 in Italy of the TIRSP. The information is summarized in Figure 
67 and Figure 68 

Figure 67 Specific component for other tobaccos, EUR per kg 

154 Only pipe tobacco. Other smoking tobaccos are levied a 24.78% ad valorem component. 

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Figure 68 Ad valorem component for other tobaccos, as % of TIRSP 

*Refers to pipe tobacco 

Summary 
Our  analysis  of  the  structure  of  the  excise  duty  on  tobacco  products  across  the  EU 
provides the following key findings: 

  Cigarettes:  

o  Looking  at  the  relative  weight  of  the  specific  and  ad  valorem  component, 
countries  can  be  clustered  into  three  groups:  a  large  group  where  the 
structure is skewed towards the specific component; a second small group of 
countries where the two components are balanced; and a third group where 
there is a preference for the ad valorem component; 

o  There is no straightforward relationship between the specific component and 
the  MED  such  that,  for  instance,  countries  with  high  a  specific  component 
also charge a high MED. Four countries do not apply the MED; 

o  Some countries appear to be non-compliant with the provisions of Article 10 
of Directive 2011/64/EU on the overall excise duty. This might be the result 
of the recent change in the thresholds and of the fact that the calculations in 
the Excise Duty Tables are based on previous year data; 

  Manufactured tobacco other than cigarettes: the situation is heterogeneous as 
no specific structure is mandated by the Directive. All three systems (pure 
specific, pure ad valorem and mixed) are present. 

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Q.1.2 What are the main features of the tobacco taxation collection systems? 
This section describes general considerations about the taxation collection systems for 
tobacco  products  while  highlighting  and  describing  specific  examples  from  Member 
States.  

Questions 

Indicators / Descriptors 

Data sources 

Q.1.2 What are the main features of the 
tobacco taxation collection systems? 

Description of excise treatment 
and marking systems 

Desk research, interviews 
with tax administrations, 
case studies 

The main steps in the tobacco taxation collection systems,  which will be described in 
the section below, are: 

  Periodical reporting on the excise duty debt 

  Refund of excise duties for damaged/returned/destroyed products 

  Acquisition of the tax stamps 

  Payment of excise duty 

These  steps  closely  mimic  the  logical  sequence  of  events  that  authorities  and 
economic  operators  must  go  through  to  respectively  collect  and  pay  excise  duties  on 
tobacco  products.  The  exact  sequence  of  events  may  differ  between  Member  States 
and  the  description  should  therefore  be  regarded  as  the  generic  approach  to  excise 
duty collection.  

Periodical reporting on the excise duty debt 
According to Article 7 of Directive 2008/118/EC, excise duty shall become chargeable 
at  the  time,  and  in  the  Member  State,  of  release  for  consumption.  155  Release  for 
consumption means any of the following: 

  The departure of excise goods from a duty suspension arrangement; 

  The holding of excise goods outside a duty suspension arrangement where 
excise duty has not been levied pursuant to the applicable provisions of 
Community law and national legislation; 

  The production of excise goods outside a duty suspension arrangement; 

  The importation of excise goods unless the excise goods are placed, immediately 

upon importation, under a duty suspension arrangement. 

Member States apply these definitions in overall the same way. The  typical definition 
applied is that the duty point is when goods leave the duty suspension arrangement of 
the bonded warehouse. Some examples of the duty point are provided: 

  The economic operator voluntarily releases the excise good for consumption 

through payment of excise duty (without the good leaving the tax warehouse 
(UK); 

  The good is dispatched, i.e. removed to home consumption thus it leaves a duty 

suspension arrangement (UK); 

155 Art. 7 (1-3) in Council directive 2008/118/EC of 16 December 2008 

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  The goods leave the duty suspension arrangement for (DK - authorized 

warehouse keepers); 

  Warehouse keepers' own consumption of excise goods (DK); 

  When the goods are received from outside of Denmark (DK – consignees); 

  When the goods depart from duty suspension (FI). 

Periodical  reporting  on  the  amount  of  tobacco  products  released  for  consumption  is 
done  for  a  specific  tax  period  during  which  the  duty  liability  is  accumulated.  The  tax 
period  differs  between  Member  States.  In  RO,  DK,  FI  and  PL,  the  tax  period  is  a 
calendar  month.  In  EL  and  the  UK,  returns  on  the  products  removed  to  home  use 
must  be  submitted  daily.  UK  operators  can  be  granted  a  duty  deferment  agreement 
whereby  reporting  and  payment  are  done  over  an  accounting  period,  usually  a 
calendar month. 

Refund of excise duties for damaged/returned/destroyed products 
According  to  Article  11  of  Directive  2008/118/EC,  excise  duty  on  excise  goods  which 
have  been  released  for  consumption  may,  at  the  request  of  a  person  concerned,  be 
reimbursed  or  remitted  by  the  competent  authorities  of  the  Member  State  where 
those  goods  were  released  for  consumption  in  the  situations  fixed  by  the  Member 
States  and  in  accordance  with  the  conditions  that  Member  States  lay  down  for  the 
purpose of preventing any possible evasion or abuse. 

Generally,  refund  of  excise  duties  is  potentially  possible  if  the  goods  are  unused, 
damaged,  unsold  or  destroyed.  Different  rules  apply  in  the  Member  States.  As  an 
example,  in  Austria  a  refund  is  possible  in  all  cases,  whereas  in  Bulgaria  a  refund  is 
only possible if the products are unused or damaged.156 

Destruction of  excise goods released for  consumption is either done by the economic 
operators  or  by  the  competent  authority.  In  the  case  of  Greece,  a  third  party 
destructor,  who  must  be  paid,  handles  destruction.  In  DK,  RO  and  the  UK,  the 
products  are  destroyed  by  the  economic  operators  under  the  supervision  of  the 
competent  authority.  However,  in  DK  and  the  UK,  the  competent  authorities  are 
merely notified of the time and place of destruction to have the option of attending. 

Tax markings 
Article  39  of  Directive  2008/118/EC  provides  that  Member  States  may  require  that 
excisable  tobacco  products  carry  tax  markings  or  national  identification  marks 
used for fiscal purposes at the time when the products are released for consumption in 
their  territory.157  Member  States  are  free  to  decide  whether  and  to  which  excise 
products  to  apply  such  a  system.  The  fiscal  marks  are  proof  that  excise  duty  is  paid 
and  is  therefore  a  mean  to  prevent  illegal  trade.  A  fiscal  mark  may  also  be  called  a 
tobacco stamp, a tax stamp, an excise stamp, a tax sticker  or a banderol. The name 
holds no indication on the characteristics of the mark. 

Scope of the marking system 

Fiscal marks are applied, at least for some tobacco products, by most Member States 
For  cigarettes  all  Member  States  besides  AT,  CY,  FI  and  SE  apply  fiscal  marks  for 
cigarettes.158 An equivalent overview for other tobacco products has not been available. 

156 Overview of tax markings within Member States provided by CECCM 
157 Art. 39 (1) in Council directive 2008/118/EC of 16 December 2008 
158 Overview of tax markings within Member States provided by CECCM 

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Some  examples  of  Member  State  differences  can  be  highlighted.  In  EL,  RO  and  PL 
fiscal marks are used for all tobacco category types (cigarettes, cigars/ cigarillos, fine 
cut  tobacco  and  other  smoking  tobacco).  In  the  UK  fiscal  marks  are  only  applied  on 
cigarettes  and  fine  cut  tobacco  (intended  for  hand  rolling).  In  DK,  fiscal  marks  are 
applied on cigarettes, fine cut tobacco and other smoking tobacco. 

Features of tax markings  

A  fiscal  mark  is  typically  self-adhesive,  and  is  therefore  attached  directly  to  the 
products (e.g.  EL, RO,  DK), or they may be printed directly on the tobacco products' 
packaging with ink (which is the case for the UK and Spain). 

Characteristics  of  fiscal  marks  differ  widely  across  Member  States  and  therefore  it  is 
not  possible  to  describe  a  “standard”  for  fiscal  marks  at  the  EU  level.  However,  an 
overall  distinction  can  be  made  between  fiscal  marks  according  to  their  features  and 
the  level  of  information  that  they  provide.  A  tentative  classification  based  on 
whether  the  economic  operator  responsible  for  production/  importation  can  be 
identified  based  on  fiscal  mark  has  been  made.  The  results  are  reported  in  Table  28 
below.  Typically,  fiscal  marks  which  allow  for  a  high  degree  of  identification  and 
tracking  of  the  product  will  as  a  minimum  contain  information  about  the  economic 
operator.  

Table 28 Overview of fiscal mark features 

Type of fiscal marks 

Member State examples 

Information reported on the fiscal mark (at 
least one is present) 

No possibility to 
identify economic 
operator 

  Bulgaria 

  Product category (name or code) 

  Czech Republic 

  Retail price of pack 

  Amount 

  Name of country/ competent authority 

  Year 

(additional to the features above) 

  Name or SEED number of the economic 

operator 

  Serial number of product identifying 

product/ operator 

  Barcode identifying product/ operator 

Possible to identify 
economic operator 

  Greece 

  Hungary 

  Malta 

  Poland 

  Spain 

  UK 

  Belgium 

  Estonia 

  France 

  Denmark 

  Germany 

  Ireland 

  Italy 

  Latvia 

  Lithuania 

  Luxembourg 

  Slovakia 

  Slovenia 

  Romania 

Note: For the missing Member States, no information was available. 
Source: Overview of tax markings within Member States provided by CECCM, case studies with selected Member States 

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In  addition  to  the  information  and  tracing  features,  fiscal  marks  also  contain  some 
security  features.  Examples  include:  watermarks,  holograms,  background  aura, 
microtext, temperature sensitive ink used on parts of the fiscal mark, design/ colour of 
the fiscal marks. 

The features of the fiscal marks imply different possibilities to tracing the products and 
combating  illicit  trade.  For  instance,  in  LV  consumers  are  given  the  possibility  to  get 
basic information about the product by using the serial number printed on the excise 
duty  stamp:  when  inserted  in  a  special  internet  site  or  sent  by  SMS  to  a  dedicated 
number, information on the product can be obtained.  

In  Member  States  where  fiscal  marks  have  multiple  security  features,  e.g.  in  EL,  RO 
and PL, it is harder to counterfeit them. In Member States where security features are 
limited we would expect to see a larger extent of illegal trade. Still, in DK, where the 
fiscal  mark  contains limited  security  features,  there  have  not  been  any  known  issues 
with  forging  of  fiscal  marks.  In  the  UK,  the  fiscal  mark  can  easily  be  forged  as  the 
specifications  of  the  fiscal  mark  (font,  size,  etc.)  are  publicly  available  information. 
However, according to the competent authority, fiscal marking represents one among 
several  security  measures  for  safeguarding  the  financial  interests  of  the  state  and  is 
mainly  aimed  at  preventing  (licit)  non-UK  marked  products  to  be  systematically 
brought into the UK without paying the duty. 

Acquisition of tax markings 

Self-adhesive  fiscal  marks  are  typically  supplied  by  the  competent  authority  to  the 
economic operator who attaches the fiscal marks to the products at a pre-determined 
stage  in  the  production  process.  The  acquisition  of  fiscal  marks  is  done  through  a 
series of steps which can be summarized to the following: 

  The economic operator applies for fiscal marks from the competent authority; 

  The competent authority approves and sends the request to a security approved 

printing house (which may be internally or externally located); 

  The printing house fabricates the fiscal marks; 

  The economic operator receives the fiscal marks by delivery or collects the fiscal 

marks at the printing house. 

When  the  fiscal  mark  is  printed  on  the  pack  of  the  tobacco  products,  such  as  in  the 
UK, the economic operator is responsible for ensuring that the correct mark is on the 
products.  A  manufacturer  or  importer  dealing  in  unmarked  tobacco  products  beyond 
the  specified  approved  purposes  (e.g.  removal  to  other  registered  premises, 
exportation, destruction or other disposal) is liable to civil penalty and the product is 
liable to forfeiture.   

National  rules  and  regulation  apply  to  the  application  process  for  fiscal  marks  and 
therefore, the overall process may vary from Member State to Member State. In some 
Member States, a financial guarantee is needed to obtain fiscal marks, unless paid for 
at the time of collection. This is the case in BE, BG, CY, DK, EE, EL, HU, IE, LU and PT. 
It differs whether this guarantee should be set separately or as part of the guarantee 
for excise duties.159 

Also,  the  rules  on  the  storing  of  fiscal  marks  are  nationally  defined,  however  as  the 
fiscal  marks  have  economic  value,  they  will  usually  the  stored  in  a  safe  area.  In  DK, 
RO and PL, there are no specific rules on storing the fiscal marks. 

159 Overview of tax markings within Member States provided by CECCM 

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Obtaining fiscal marks may or may not  come  at a cost  for the  economic operator.  In 
EL and RO, a small fee per fiscal mark is paid, however this fee is subtracted from the 
excise  duty  payable.  In  DK,  the  fiscal  marks  are  free  of  charge  to  the  economic 
operators  if  supplied  in  uncut  and  non-adhesive  sheets  of  paper.  If  cut  into  single 
pieces, printed on self-adhesive paper etc., the fiscal marks come at a minor cost. 

Fiscal  marks  which  are  unused  or  damaged/  destroyed  with  the  products  are 
refundable so that the excise duty represented by the fiscal mark is no longer liable in 
some Member States. In all of the case study countries, it is possible to get a refund 
of fiscal marks. The overall process is as follows: 

  The economic operator applies for refund of the fiscal marks (documentation 

requirements vary). 

  Unused fiscal marks are returned to the authority for destruction 

  Products containing fiscal marks are destroyed upon the approval of the 

authority and following the nationally established protocol. 

In  DK,  where  excise  duty  is  paid  through  payment  of  fiscal  marks,  return  of  fiscal 
marks entail refunds of the excise duty initially paid for the fiscal marks. 

The system of fiscal marks clearly implies costs for the economic operators in terms of 
requesting,  obtaining,  applying  and  potentially  destroying  the  fiscal  marks.  However, 
their use brings some benefits in terms of safeguarding the budgetary interests of the 
state and to a lesser extent of limiting illegal trade. The size of these benefits depends 
on the features of the fiscal marks. If the fiscal marks are easily forged or can only be 
traced  to  a  limited  extent,  as  is  the  case  in  DK  and  the  UK,  the  effects  of  the  fiscal 
mark in terms of combating illegal trade are limited. 

Payment of excise duty 
When excise duties become payable, a system of forms is used through which the 
economic operators declare and pay excise duty. The system may either be electronic 
or  paper-based.  In  DK,  operators  must  use  the  tax  administration's  online  system, 
TAST-SELV, to declare excise duties for a tax period. The system allows for automatic 
payment  to  the  authorities  through  the  online  payment  system  NETS  (only  for 
cigars/cigarillos  as  payment  of  excise  duties  for  other  tobacco  products  are  done 
through payment of fiscal marks).  

In  the  UK,  an  XML-based  tool  called  Alcohol  and  Tobacco  Warehousing  Declarations 
(ATWD)  is  used  for  the  exchange  of  periodical  reporting  between  tax  administrations 
and  economic  operators.  In  case  of  larger  manufacturers,  ad  hoc  channels  of 
communication are set up. 

Payment  of  excise  duty  is  either  done  at  the  duty  point  or  after  a  credit  term.  A 
specific  example  is  found  in  DK,  as  the  payment  of  excise  duties  is  done  after  the 
acquisition  of  fiscal  marks.  Sometimes  a  credit  term  applies.  Examples  have  been 
identified  of  credit  terms  up  to  2  months  and  15  days,  if  the  economic  operator  has 
provided  a  financial  guarantee  for  the  excise  duty  payable.  In  the  UK  economic 
operators  benefitting  from  a  duty  deferment  agreement  settle  the  duty  debt  on  a 
monthly  basis  and  the credit  term  is  15  days  from  the  end  of  the  accounting  period, 
i.e. within the 15th  day of the following month. In EL the credit term is set at 26 days 
from  the  date  of  the  release  for  consumption,  while  in  RO  the  debt  must  be  settled 
before the 25th of the month following the release for consumption. 

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Summary 
Our  analysis  of  the  features  of  the  different  tobacco  taxation  collection  system 
highlighted that: 

  Member States overall apply the same definition of the duty trigger point, e.g. 

when the excise good becomes “chargeable” for payment;   

  Periodical reporting of the amount of tobacco products released for consumption 
is done for a specific tax period during which the duty liability is accumulated: 
this can vary between 1 day and 1 month; 

  Destruction of excise goods released for consumption is either done by the 

economic operators or by the competent authority; 

  There is substantial cross-country variability on the issue of fiscal markings in 
terms of: scope of the system, technical features, modes of acquisition and 
reporting;  

  When excise duties become payable, a system of forms is used through which 

the economic operators declare and pay excise duty. The system may either be 
electronic or paper-based. 

Q.1.3  What  licencing  and  authorisation  apply  to  operators  involved  in  the 
tobacco supply chain? 
This  section  is  aimed  at  mapping  the  current  arrangements  on  licensing  and 
authorisation  of  economic  operators  dealing  in  tobacco  products  with  the  aim  of 
identifying  relevant  differences  in  terms  of  scope  and  requirements  between  Member 
States.  The  analysis  distinguishes  between  products  that  are  defined  in  the  Directive 
and products that are not explicitly listed, namely raw tobacco and e-cigarettes.  

Questions 

Indicators / Descriptors 

Data sources 

Q.1.3 Does licencing and authorisation 
apply to operators involved in the tobacco 
supply chain? 

  To whom and which products does it 

apply? 

  What obligation does licencing imply 
(especially in terms of verification, 
identification, monitoring, stock 
management, tracking and tracing)? 

List of licensing and 
authorisation and related 
information obligations that 
apply in each MS 

Desk Research 

Survey to national tax 
authorities 

According to the results of the survey to economic operators, 70% of the respondents 
reported to be subject to some form of licensing and authorisation. As for the kinds of 
products  falling  within  the  scope  of  the  authorisation/licencing  system,  substantial 
differences  between  Member  States  exist.  Indeed,  as  discussed  in  more  detail  in 
Question  2,  Member  States  can  decide  to  extend  the  scope  of  the  excise  regime  to 
goods  not  explicitly  mentioned  in  Directive  2011/64/EU.  As  an  example,  tobacco 
leaves are treated as excisable in PL (if sold to final consumers), whereas they are not 
treated as such in the majority of  Member States.  

For the time being, for the sake of clarity a rough distinction is worth making between 
products  that  are  explicitly  defined  in  the  Directive  and  products  which  are  not 
defined. As for the latter, the focus will be put on raw tobacco and e-cigarettes. 

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Products not defined in the Directive 
As far as raw tobacco is concerned, in 15 countries this product is in free circulation 
meaning  that it is  not  subject  to  any  licencing or  authorisation  the  reason  being  it is 
not  regarded  as  an  excisable  product.  In  9  countries  some  forms  of  authorisation  or 
licencing  is  in  place  with  a  substantial  variance  in  the  scope  of  the  licencing  and  the 
information an economic operator must submit.  

A tentative categorisation of the systems distinguishes between:  

  Systems where none of the operators are subject to authorisation: in 

such systems warehousekeepers authorised for manufacturing tobacco products 
are also allowed to receive raw tobacco. Usually the authorisation to 
manufacture tobacco products requires the economic operator to keep detailed 
records of the use of raw material, e.g. in a production account; 

  Systems where only one type of economic operator is subject to 

authorisation: normally this would be either the tobacco grower (e.g. ES, BE, 
LI) or the warehousekeeper authorised for manufacturing tobacco products (e.g. 
DK, FI160). In FI raw tobacco can be moved under duty suspension in the national 
territory provided it is under coverage of a commercial document. It is not 
uncommon that registries of tobacco growers are kept by the authorities 
responsible for agricultural policy, such as the Ministry of Agriculture (e.g. ES), 
however there are instances where licencing systems are specifically designed 
for excise duty purposes (e.g. LT, BE); 

  Systems where several economic operators are subject to authorisation: 
these systems would usually imply that both the supplier of raw tobacco, i.e. the 
grower, and the purchaser (e.g. first processor, manufacturer) hold an 
authorisation. In NL, SK, HU, for instance, all operators willing to trade with it 
(growing, drying, fermenting, receiving, storing and dispatching) must register 
at customs office and notify the customs office of any movement. In SK, in 
addition the initial registration, traders are also required to keep records of 
tobacco raw material (received, dispatched). In HR growers are issued a licence 
on the basis of a contract with the registered company which processes raw 
tobacco (the operator must be registered in the Register of Tobacco Processors 
with the Ministry of Agriculture). 

In some countries (e.g. NL, PL, RO) transported raw tobacco must be 
accompanied by a document that provides information about the origin of the 
movement and the destination.  

In CY, EL, RO and PL raw tobacco can only be traded between authorised 
operators. In CY trade can only occur between operators holding a licence for 
trading in native tobacco in premises authorised as “native tobacco 
warehouses”. 161 Similarly, in RO raw tobacco or partially processed tobacco can 
only be sold to authorised warehouse keepers. In PL, raw tobacco can be traded 
between different operators but it is subject to excise duty when sold to other 
operators than tax warehouses and registered tobacco intermediaries. 
Additionally, raw tobacco must be marked and packaged in close boxes. In EL, 
growers have to conclude contracts with first processors of raw tobacco which, in 
turn, have to be registered in the unified register for traders of agricultural 
products kept by the Ministry of Agriculture. 

160 Authorised warehousekeepers and registered consignee can deal in raw tobacco as part of their licence. 
The category of ”raw tobacco importer” exists on paper, however in practice no such operator exists.  
161 This is a theoretical issue as no growers exist in CY.  

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Some  of  the  countries  where  there  is  no  system  of  authorisation  for  dealing  in  raw 
tobacco are considering introducing tighter controls of the supply chain. This is mainly 
due to the rise in the size of illicit trade. 

With  respect  to  e-cigarettes,  at  present  they  are  not  subject  to  excise  duties  in  all 
buy one Member State. Where they are treated as a medicinal product, such as in CZ, 
DK,  SE  and  (if  containing  nicotine)  in  EE,  they  require  an  approval  and  can  only  be 
sold in pharmacies. In these cases the competence belongs to the Ministry for Health. 
Interestingly,  in  Greece,  the  production  and  trade  of  e-cigarettes  may  only  be  done 
“subject  to  licensing  by  the  Ministry  of  Health”,  the  lack  of  methodological  rules 
applicable  for  obtaining  authorisation  implies  that  no  operators  have  been  able  to 
apply  for  licenses.  As  a  result,  all  e-cigarettes  sold  on  the  Greek  market  lack  the 
appropriate  license.  In  IT,  a  recent  change  in the  law,162  determined  that  e-cigarettes 
(and  each  of  their  components)  should  be  treated  as  a  surrogate  tobacco  product 
(“prodotto succedaneo dei prodotti da fumo”) and should be levied a consumption tax 
of 58.5% of the retail selling price. Economic operators dealing in such products must 
obtain  an  authorisation  by  the  Agency  for  Customs  and  State  Monopolies.  The 
requirements are the same as those imposed on warehouse keepers.  

Products explicitly defined in the Directive 
As  made  clear  in  Directive  2008/118/EC,  establishing  a  system  of  authorisation 
where economic operators involved in the supply chain of tobacco products are subject 
to  authorization  by  the  competent  authorities  is  instrumental  in  monitoring  and 
facilitating  the  collection  of  tax  revenue.163  The  same  Directive  lays  down  the  basic 
principles  and  the  minimum  requirements  applicable  to  all  Member  States  for  setting 
up a system of authorisation.  

The  scope  of  the  provisions  laid  down  in  the  Directive  in  terms  of  tobacco  products 
subject  to  excise  duty  is  defined  by  other  Directives  as  specified  in  Article  1.  In  the 
case  of  tobacco  products,  the  definitions  of  the  exact  categories  were  laid  down  in 
Directives  95/59/EC,  92/79/EEC  and  92/80/EEC,  which  have  been  then  replaced  by 
Directive 2011/64/EU. The latter serves as the reference point.  

As far as the types of  economic operators  subject to authorisation, a minimum set is 
defined in Article 4 of Directive 2008/118/EC. The definitions are reported in Table 29 
below.  

Table 29 Legal definition of economic operators, from an excise duty point of view 

Legal definition of 
economic operators 

Warehouse keeper 

Tax warehouse 

Definition 

A natural or legal person authorised by the competent authorities to produce, 
process, hold, receive or dispatch excise goods under a duty suspension 
arrangement in a tax warehouse 

A place where excise goods are produced, processed, held, received or 
dispatched under duty suspension arrangements by an authorised warehouse 
keeper 

Registered Consignee 

A natural or legal person authorised by the competent authorities to receive 
excise goods moving under duty suspension arrangement from another 
Member State 

Registered Consignor 

A natural or legal person authorised by the competent authorities to only 
dispatch excise goods under a duty suspension arrangement upon their 

162 Legislative Decree n.76 28 June 2013 
163 Paragraphs 15 and 16 of the preamble to Directive 2008/118/EC  

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Legal definition of 
economic operators 

Definition 

release for consumption 

Temporary registered 
consignee164 

For a registered consignee receiving excise goods only occasionally, the 
authorisation referred to in Article 4(9) of Council Directive 2008/118/EC shall 
be limited to a specified quantity of excise goods, a single consignor and a 
specified period of time. Member States may limit the authorisation to a single 
movement. 

Source: Directive 2008/118/EC Art.4 and Art.19 (3) 

In general, Member States have built on this minimum framework by broadening the 
scope  (in  terms  of  products  and  types  of  economic  operators)  of  the  authorisation 
regime and by adding more specific provisions on the procedures and obligations each 
authorisation  entails.  Table  30,  below  provides  an  overview  of  the  typologies  of 
economic  operators  which  need  an  authorisation  but  which  are  not  explicitly 
mentioned in Directive 2008/118/EC.  

Table 30 Categories of economic operators not defined in Directive 2008/118/EC 

Type of economic 
operator 

Activities that can be performed within 
the scope of the licence 

Examples of country 

Tobacco retailer 

Retail sale of tobacco products. 

ES, IT, FI, EL, UK (Scotland) 

Duty 
representative 

Legal or natural person responsible 
authorised to act as an agent for non-
domestic based operators  

DK, UK 

Owner of excise 
goods 

A person who has been authorised and 
registered to deposit their duty-suspended 
goods in an excise warehouse 

UK 

Registered 
Commercial 
Importer 

Import duty-paid excise goods  

RO, UK 

As  a  consequence,  provisions  vary  a  great  deal  between  countries  and  types  of 
economic  operators.  While  it  is  impossible  to  provide  a  complete  mapping  of  all  the 
activities, a high level analysis has been conducted in a systematic manner in the case 
study  countries  through  desk  research  and  interviews.  Some  information  is  also 
available for a broader set of Member States.   

For  a  purpose  of  clarity,  activities  and  obligations  have  been  grouped  into  two  broad 
categories,  i.e.  those  aimed  at  gaining  an  authorisation  for  the  first  time  and  those 
related to the conduction of the business once the authorisation has been granted. 

Gaining an authorisation 

At  a  general  level,  the  activities  carried  out  in  this  phase  are  aimed  at  verifying  that 
the  business  is  genuine  and  that  the  economic  operator  has  the  (technical, 
operational,  financial)  ability  to  deal  in  excise  goods.  In  all  cases  it  is  the 
responsibility  of  the  economic  operator  to  initiate  the  process  of  requesting  an 
authorisation  by  contacting  the  relevant  authorities.  In  some  countries,  such  as  Italy 
and Spain, tax administrations would have local offices dealing with different phases of 
the monitoring and collection of excise duties, including authorisations. 

164 Article 19(3) Council Directive 2008/118/EC 

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In  the  case  of  warehouse  keepers,  information  to  be  provided  by  the  economic 
operator to the satisfaction of the tax authority would include:  

  information on the company (e.g. legal form, place of business, business plan, 

financial viability); 

  information on the relevant people in the company (e.g. criminal records of the 

administrators); 

  description of the premises where the activity would take place (e.g.   

blueprints, security arrangements and proof of ownership and/or rental of the 
premises, description of the types of activities to be performed, the types of 
tobacco goods that will be dealt in, the record keeping system); 

  (in some cases) economic need underlying the request. 

The  vetting  of  the  request  in  most  of  the  cases  entails  on-site  visits  of  the 
premises to check the correspondence of the declared information in the documents. 
This is not the case in DK, where premises are not inspected in this phase, so as not 
to  overburden  the  economic  operator  and  delay  the  approval.  Additionally,  financial 
securities shall be provided to cover for potential losses in the running of the business. 
The  size  of  the  latter  is  related  to  the  outcomes  of  a  risk  assessment  and  to  the 
average size of the stocks. In some countries the quantification of the guarantee may 
take up to 4 months, thus the tax authority would usually require a minimum security 
in order to prevent delays. 

technical 

As  for  the  typology  of  the  consignor  and  the  consignee,  information  requirements 
are  generally  less  stringent  than  in  the  case  of  warehouse  keepers.  In  addition  to 
providing information on the business to verify the compliance with the legal, financial 
registered  as 
and 
consignors/consignees  would  need  to  demonstrate  their  ability  to  keep  records  and 
would  be  requested  to  provide  a  financial  security.  The  same  holds  for  a  temporary 
registered  consignee.  It  is  possible  for  the  same  operator  to  hold  multiple  licences: 
this is often the case of larger manufacturers which would normally act as authorised 
warehouse keepers, consignees and consignors.  

requirements,  operators  seeking 

to  become 

The whole process of granting a licence by its very nature entails a significant degree 
of  interaction  between  the  tax  authority  and  the  economic  operator.  For  this 
reason,  some  countries  set  up  dedicated  units,  as  is  the  case  in  the  UK,  where  the 
National  Registration  Unit  acts  as  the  single  contact  point  for  the  matter  of 
authorisation.  Failure  to  comply  with  one  or  more  requirements  need  to  lead  to  a 
definitive refusal of the application, in fact recommendations can be issued on how to 
address the most problematic aspects.  

When  the  tax  administration  judges  the  applicant  to  fulfil  the  requirements,  a  new 
entry is created on the European register of operators (SEED165), an EU-wide database 
currently  integrated  into  the  EMCS  where  information  on  economic  operators 
authorised  to  deal  in  duty-suspended  goods  are  stored  and  automatically  matched. 
Since 2009, any economic operator established in the EU also needs to have an EORI 
number,  166 which enables the identification of economic operators within the entire EU 
customs  territory  and  has  become  mandatory  for  all  engaged  in  import  or  export  of 
goods, transit transportations or when performing other customs related activities.167 

165 System for the Exchange of Excise Data (SEED) 
166 Economic Operators Registration and Identification number (EORI) 
167 http://ec.europa.eu/ecip/security_amendment/who_is_concerned/index_en.htm 

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In  countries  like  IT  and  ES,  where  the  sale  of  tobacco  products  is  a  state  monopoly, 
and  in  a  few  other  countries  such  as  DK,  EL  and  FI,  actors  further  down  the  supply 
chain, such as wholesalers and retailers, are also required to hold a licence to deal 
in  tobacco  products.  In  Spain,  the  production  intended  for  the  national  market  must 
be  sold  to  the  authorized  distributors  (which  in  turn  will  supply  it  to  the  network  of 
retailers).  

Not  only  economic  operators  must  be  registered,  but  also  premises  where 
production/holding is carried out must be duly authorized. The process resembles the 
one  warehouse  keepers  must  undertake  A  pre-approval  on-site  visit  is  envisioned  in 
order to verify that the premises are secure and suitable for the purpose and to assess 
potential  risks  to  the  revenue.  There  exist  different  types  of  authorised  premises 
across  Member  States  depending  on  the  types  of  activities  carried  out  (e.g. 
manufacturing/storing)  and  the  excise  duty  status  of  the  products  (e.g.  duty 
suspended/duty-paid).  In  Cyprus  excise  warehouses  can  be  classified  into  three 
categories: general tax warehouses, where it is possible to receive, hold and dispatch 
commodities  owned  by  more  than  one  authorized  warehouse  keepers;  private  tax 
warehouses,  owned  by  a  single  authorised  warehouse  keeper;  and  special  tax 
warehouses which can be further distinguished in tax free shops and other premises to 
cover special activities. 

Typologies of authorised premises in the UK 
In the UK, for instance, a premise might be authorised as: 

  a registered factory where tobacco can be manufactured and final products can be 

stored in duty-suspension for up to 24 hours; 

  a registered store where UK-manufactured goods intended for the home market, 

for export or duty free can be stored in duty suspension; 

  an excise warehouse where UK-manufactured goods intended for export or duty 

free can be hold in duty suspension; and 

  a customs warehouse where imported products are hold. 

The  same  area  of  an  authorized  premise  cannot  be  a  registered  store  and  an  excise 
warehouse, while both of them can be at a time a customs warehouse.  Registered store 
can only be applied for by manufacturers, whilst warehouse  keepers not authorised for 
the manufacturing of tobacco goods can only apply for registering their premises as an 
“excise warehouse” (and a “customs warehouse” when trading with third countries). In 
the  case  when  an  economic  operator  trades  with  EU  countries,  the  facility  is  also 
authorised as a “tax warehouse”. For all new approvals an initial maximum period of 12 
months is granted during which checks can be carried out.  

As far as the scope of the licence is concerned, in some instances authorisations come 
with  a  time  limit.  In  some  countries  (e.g.  FI)  newly  registered  operators  might  be 
granted  an  initial  temporary  authorisation  during  which  the  tax  administration  may 
conduct frequent checks. This is the case, among others, for warehouse keepers in RO 
where  licences  need  to  be  renewed  every  3  years.  In  other  cases,  such  as in  EL  and 
FI,  an  authorisation  is  valid  as  long  as  the  operator  complies  with  the  requirements, 
unless  otherwise  specified  the  approval  agreement.  In  any  case,  whenever  a  change 
occurs,  the  tax  administration  should  be  duly  informed  and  the  authorisation  is 
amended. 

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In the case of  Temporary Registered Consignee, the provisions of  the Directive leave 
substantial  room  for  national  administrations  to  decide  on  the  scope  of  the 
authorisation.  In  some  countries  (e.g.  RO,  DK)  the  registration  is  valid  for  either  a 
given  period,  a  given  quantity  of  shipment  or  shipment  from  a  specific  manufacturer 
or a combination, while in the UK an authorisation known as Temporary Consignment 
Authorisation (TCA) must be obtained on a consignment-by-consignment basis.  

In  terms  of  the  types  of  products  a  licence  authorises  to  deal  in,  again  provisions 
differ  between  countries.  Once  an  authorization  is  granted,  any  kind  of  tobacco 
product allowed by the UK law can be dealt in by a UK-registered economic operator. 
In contrast, in DK, RO and FI the approval agreement specifies the product categories. 

Authorisations  usually  feature  a  high  degree  of  customisation  also  where  allowed 
activities  are  concerned.  For  instance,  certain  operators  might  be  authorised  to 
conduct  certain  activities  (e.g.  bulk  breaking,  repackaging),  while  others  would  not. 
For  instance,  in  the  UK,  the  agreement  between  the  tax  administration  and  the 
economic operators defines what “bulk breaking” should be done, the premises where 
it  should  take  place,  as  well  as  how  it  should  be  done.  The  same  holds  for  the 
procedure to be followed when removing goods for tests and when returned products 
are to be destroyed. 

After obtaining the authorisation 

Even  though  Directive  2008/118/EC  provides  a  (high-level)  description  of  the 
requirements and obligations for different types of economic operators, procedures are 
far from being harmonized across the EU. Indeed, as explained in the previous section 
with  reference  to  obtaining  an  authorisation,  Member  States  have  adopted  specific 
arrangements that are a better fit for the specificities of the national market and the 
overall functioning of the administration.168 

At  a  general  level,  the  manufacturing,  storing  and  movement  of  tobacco  products 
must be properly accounted for by means of an adequate record keeping system. At 
any  time  it  should  be  possible  for  the  tax  administration  to  calculate  the  amount  of 
excise  debt  and  verify  the  excise  status  of  each  product.  In  the  UK,  for  example,  all 
excise goods must be marked so that they can be identified in the stock accounts in a 
univocal  manner  form  their  arrival  to  their  removal  form  the  duty  suspension.  
Warehouse  keepers  are  requested  to  take  the  stock  of  all  excise  goods  in  the 
warehouse  once  or  twice  a  year,  while  periodical  returns  must  be  compiled  for  the 
calculation  of  the  excise  debt.  These  are  to  be  filed  to  the  tax  administration  at  pre-
defined dates: daily (as in the UK, unless an economic operator benefits from a duty 
deferment agreement whereby reporting is made monthly), monthly, or quarterly (as 
in Denmark). Manufacturers are obliged to keep control of all incoming raw tobacco, 
of all partly finished tobacco used in production, of all disposed tobacco and of stock of 
finished tobacco goods, so that the input volume of raw tobacco can be matched with 
the output finished tobacco products. 

As for the movement of tobacco products, since 2011 the EMCS has replaced the 
paper  document  that  previously  accompanied  excise  goods  moving  under  duty 
suspension.  Movements  to  approved  premises  in  the  EU  now  require  an  electronic 
declaration  (e-AD)  to  be  made  and  accepted  by  the  EMCS  system,  which  also 
generates a unique code known as Administrative Reference Code (ARC).  

168 A detailed description of the activities carried out by both tax administrations and economic operators is 
provided Question 4 

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Obligations under for the movement of excise goods under duty suspension 
arrangement 
The EMCS is a platform on which all movements of excise goods under a duty suspension 
arrangement must be recorded. The consignor must prepare the e-AD and submit it to the 
national administration in the Member State of departure. The consignor cannot start the 
dispatch before the date stated in the e-AD and before a validated e-AD and an ARC has 
been returned to the consignor. When the goods arrive, the registered consignee is 
required to generate a report of receipt and submit it to the Member State of destination 
within five days. Movements under duty suspension shall occur under the cover of a 
financial guarantee and must be recorded in the EMCS. 

Goods  already  released  for  consumption  (duty  paid),  do  not  move  under  EMCS 
procedures. Instead, economic operators are obligated to have goods accompanied by 
a SAAD169 in cross-border movements.170  

Different  provisions  apply  to  other  types  of  economic  operators.  For  instance,  given 
the  non-continued  nature  of  the  business  in  tobacco  products,  Temporary  Registered 
Consignees  are  usually  required  to  undertake  additional  steps  when  moving  tobacco 
products.  These  can  range  from  applying  for  a  separate  authorisation  for  each 
shipment  (as  in  the  UK),  to  providing  notification  of  the  movement  prior  to  its 
commencement  (as  in DK),  to  paying  the  excise  duty  in  advance.  At  the  same  time, 
this type of operators only needs to keep records of product delivery.  

Summary 
Our analysis of the architecture of the authorization and licencing systems across the 
EU provides the following key findings: 

  There exists a significant degree of customisation in the design of licencing 

systems across the EU: Member States have usually built on the provisions laid 
down in the relevant EU law and then adapted it to the specificities of their 
markets; 

  Systems differ under a variety of aspects ranging from scope (products and 

economic operators) to the sequence of activities to be undertaken; 

  Heterogeneity is particularly high in the case of tobacco products not explicitly 

defined in Directive 2011/64/EU; 

  Warehouse keepers are generally regarded as a key economic operator to which 

particular attention is paid in terms of thoroughness and frequency of the 
controls performed when issuing a licence. 

Q1.4  What  are  the  processes  /  activities  performed  by  Member  States 
authorities to ensure the collection of tax revenue (e.g. in terms of monitoring, 
tax assessment, collection, authentication and verification, auditing, etc.)? 
This  section  provides  a  mapping  of  the  processes/activities  performed  by  Member 
States’ authorities to ensure the collection of tax revenues. When possible, high level 
descriptions of the different steps involved in each activity are provided together with 
concrete examples from Member States. 

169 Simplified Accompanying Administrative Document (SAAD) 
170 Commission Regulation (EEC) No 3649/92 of 17 December 1992 

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Questions 

Indicators / Descriptors 

Data sources 

Q1.4 What are the processes / activities 
performed by Member States 
authorities to ensure the collection of tax 
revenue (e.g. in terms of monitoring, tax 
assessment, collection, authentication and 
verification, auditing, etc.)? 

List of processes / activities / 
functions performed by MS 
authorities to ensure the 
collection of tax revenue 

Desk research (for a 
selected number of MS 
only, depending on 
language availability) 

Survey to national tax 
authorities 

The activities carried out by Member States authorities to secure the collection of tax 
revenues cover the whole value chain of tobacco products.  

first  step 

is  represented  by 

the  authorisation. 

Authorisation 
In  all  countries  a 
The 
licencing/authorisation  system  is  in  place  and  serves  the  aims  of  (i)  distinguishing 
genuine businesses from fraudulent activities and (ii) providing the tax administration 
with intelligence on the risk profile of the different actors involved in the value chain. 
As  already  explained,  the  information  provided  during  registration  should  allow  the 
administration  to  get  a  full  picture  of  the  legal,  financial,  business  situation  of  the 
operator.    In  ES  and  PT,  for  example,  a  warehouse  keeper  authorized  for  production 
must  submit  a  detailed  description  of  the  production  plant  (including  machines  and 
processes)  and  communicate  the  yields  deriving  from  the  quantity  of  raw  materials 
used  in  the  production  process.  This  represents  the  basis  for  identifying  possible 
differences in the volume of the final output. At the same time, the ability to keep the 
commercial  records  (either  in  manual  or  electronic  form)  of  the  excise  goods 
received, stored and removed is regarded as a pre-requisite for gaining the necessary 
authorisation  for  many  of  the  typologies  of  operators.  Such  an  arrangement 
represents  a  first  defence  against  possible  threats  to  the  budgetary  interests  of  the 
state.  In  some  countries  licenses  are  subject  to  time  limits,  thus  they  need  to  be 
periodically renewed. In other instances, periodic controls are carried out with the aim 
of  verifying  the  continued  compliance  with  the  requirements  by  the  authorized 
economic  operator.  In  both  cases  the  aim  is  to  have  an  updated  picture  of  the 
situation. 

Record keeping and reporting 
As  the  production  of  any  tobacco  product  starts  with  the  availability  of  the  raw 
materials, in some Member States the monitoring of the logistics of tobacco products 
starts at the stage of cultivation/import of raw tobacco. As pointed out before, in the 
majority  of  countries  it  is  in  free  circulation,  thus  economic  operators  trading  in  raw 
tobacco  are  not  subject  to  a  specific  licencing  regime.  The  obligations  in  terms  of 
authorisations  and  reporting  vary  a  great  deal  between  countries  and  range  from 
providing  a  minimum  set  of  information  on  the  identity  of  the  operator  upon 
registration (as in HU with growers) to keeping detailed records (as in SK, RO and NL). 

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Monitoring the early stages of the tobacco value chain in SK and other 
countries 
In Slovakia the flows of raw tobacco are closely monitored as traders are not only 
required to keep records of raw tobacco received and delivered but also to notify the 
customs office prior to any receipt of such raw tobacco material in the tax territory from 
another Member State, dispatch to another Member State, import from third countries 
or export to third countries. Information to be provided include: the operator’s 
identification data, the quantity, brand name and the respective code of the combined 
nomenclature of raw tobacco, identification data of the supplier or purchaser of tobacco 
raw material, identification data of a person to/from whom it sells/purchases tobacco 
raw material, and the place of delivery of tobacco raw material.  

Similarly, in Romania, the Netherland and Finland raw tobacco can only move under the 
cover of a commercial accompanying document. In Cyprus although raw tobacco is not 
subject to excise duties, it must be placed in an authorised customs warehouse or tax 
warehouse upon importation or entry into the territory. 

At a more advanced  stage of the  value chain, warehouse  keepers  represent a critical 
node,  thus  their  operations  are  usually  kept  under  tight  control.  Virtually  all 
interviewed countries reported that they exert controls on warehouse keepers involved 
in  the  manufacturing  and  holding/storing  of  tobacco  products.  These  controls  entail 
the keeping of detailed records of all the tobacco products produced/stored/released 
for  consumption/received/dispatched  to  a  level  of  detail  that  allows  for  the  correct 
calculation of the excise duty debt at each point in time. For these reasons, warehouse 
keepers  are  required  to  keep  copies  of  the  document  accompanying  the  goods,  e.g. 
delivery  notes,  EMCS  clearances,  importation  documents.  In  general  records 
encompass a minimum set of information including: date, type of tobacco product, the 
brand, the size of retail pack, the description of the goods, the duty status, the current 
location  within  the  warehouse,  the  name/address/VAT  registration  number  of  the 
owner.  The  ability  of  the  record  keeping  system  to  live  up  to  certain  minimum 
standards,  i.e.  to  include  a  minimum  set  of  information,  is  assessed  as  part  of  the 
controls  performed  when  issuing  the  authorisation.  Records  must  be  kept  for  a 
number  of  years (e.g.  4 years in PT, 6 years in the UK and in MT, 7  years in CY, 10 
years  in  EL)  as  they  may  be  used  by  administrations  when  conducting  audits, 
investigations and checks. 

In addition to this, warehouse keepers are often requested to provide the national tax 
administration with periodical reports giving details of excise goods stored/released 
from the tax warehouse. The submission of these reports often coincides with the end 
of the accounting period which might or might not correspond to a calendar month. In 
SI, for instance, the customs authority is provided with monthly excise duty accounts 
and  monthly  stock  lists.  In  some  countries,  the  communication  between  the  tax 
administration  and  the 
is  simplified  by  creating 
preferential  channels  of  communication.  In  the  UK,  the  Large  Business  Service 
(LBS) within Her Majesty’s Revenues and Customs (HMRC) acts as the single contact 
point  for  large  businesses  on  any  matter  concerning  taxation,  whereas  in  IT,  given 
that  the  distribution  is  dominated  by  one  single  firm,  the  tax  administration  is 
connected  with  the  operator’s  IT  systems  in  such  a  way  that  allows  for  getting  real 
time data on the stocks of tobacco products in the different premises.  

larger  economic  operators 

In  the  case  of  manufacturers,  obligations  in  terms  of  record  keeping  and  reporting 
are  even  more  demanding.  Operators  are  requested  to  keep  appropriate  records 
showing  the  quantities  and  description  of  all  materials  received,  all  materials  used  in 
each  manufacturing  batch,  all  materials  disposed  of,  any  refuse  deriving  from 
materials  used,  all  refuse  disposed  of  and  all  tobacco  products  in  possession  prior  to 

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the  commencement  of  the  production.  These  documents  should  allow  for  a  full 
reconciliation of the inputs and the outputs, an exercise which might be conducted by 
tax  administrations  periodically  (as  part  of  audits)  or  based  on  the  results  of  risk 
assessment.   

Thanks  to  the  way  in  which  the  market  is  structured,  in  some  countries  controls  can 
cover  the  whole  value  chain  and  reach  out  to  the  retail  level.  In  Spain,  where  the 
sale  of  tobacco  products  represents  a  state  monopoly  whereby  retailers  act  as 
authorized dealers on behalf of the state, the sale of cigarettes can only be performed 
through  the  use  of  machines  which  need  to  be  registered.  Similarly,  in  Hungary, 
retailers  are  requested  to  submit  daily  reports  on  the  level  and  composition  of  their 
sale to enable the tax authority to monitor the consumption patterns.  

Fiscal markings 
As  pointed  out  in  Q.1.2,  fiscal  markings,  in  addition  to  serving  as  proof  for  the 
payment  of  excise  duties,  might  well  serve  the  aim  of  securing  the  collection  of  tax 
revenues.  Indeed,  in  those  instances  where  economic  operators  must  request  the 
stamps  from  the  tax  administration,  checks  on  the  stocks  of  stamps  provide  an 
additional security measure against tax evasion. In PT and HU, an economic operator 
willing to get tax stamps needs to file an on-line request: in this way real-time data on 
the number of tax stamps available to each operator is available to the tax authority. 

Financial securities 
Additionally,  tax  administration  in  order  to  secure  the  payment  of  the  duty  debt 
require  economic  operators  to  provide  financial  security  (e.g.  in  the  form  of  a 
guarantee  or  a  promissory  note)  to  cover  possible  losses.  These  guarantees  are 
usually calculated on the basis of the average periodical size of the stocks and of a risk 
assessment of potential excise duty loss. Sometimes, a single guarantee can be valid 
for  a  variety  of  premises  belonging  to  the  same  operator.  This  type  of  guarantee  is 
additional to the one that must be provided when tobacco products move under a duty 
suspension arrangement. 

Physical inspections and checks 
Physical  inspections  and  audit-based  checks  are  performed  either  on  a  regular 
basis, based on  risk assessments  or  randomly.  In DK,  for instance, the monitoring is 
conducted  following  a  categorization  of  economic  operators  based  on  track  record  of 
compliance  with  excise  duty  law.  This  kind  of  checks  are  aimed  at  verifying  the 
correctness of the reported figures by cross-checking the correspondence between the 
actual stocks of tobacco products and the supporting documentation; at assessing the 
compliance  with  the  terms  and  conditions  of  the  approval;  and  at  evaluating  the 
quality of the accounting systems in place. 

Not  only  do  tax  administrations  perform  controls  in  the  premises  where  tobacco 
products are manufactured and stored, but checks are also carried out on vehicles and 
suspicious movements. In this case, the selection is made based on the results of risk 
assessments or randomly. The German tax administration reported that over 600,000 
controls of vehicles involving some 900,000 people were conducted in 2012 alone.  

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Permanent controls at the manufacturer’s premise in IT and CY  
In IT and CY, government officials are permanently stationed at the manufacturer’s 
premises to keep track of the movements (inflows/outflows/losses/destruction) of all the 
products/raw materials and calculate the amount of products (i.e. the excise duty debt) 
released for consumption. 

Officials  are  responsible  for  keeping  track  of  all  the  operations  of  production,  storage, 
receipt and dispatch; for checking the quantity of the excise goods that flow through the 
plants and for inspecting trucks and wagons. The kind of controls performed encompass: 
(i)  formal  controls  at  the  entry  points  of  the  facility  to  verify  the  accompanying 
document; (ii) substantial checks to verify that the characteristics of the goods are the 
same  as  those  indicated  in  the  documents;  (iii)  surveillance  of  the  perimeter  of  the 
facility; (iv) during closing times, the government officials seal the entry points used by 
vehicles. 

In IT, officials are hosted in separate, high-security rooms equipped with the necessary 
IT tools and structured in a way such that they have a complete control of all the areas 
of the facility. The warehouse keeper shall bear the costs related to provide the facilities 
and the equipment. 

Summary 
Our analysis of the activities performed by Member States to ensure the collection of 
tax provides the following key findings: 

  Activities related to the defence of the budgetary interests of the state may 
cover the whole tobacco product value chain starting from tobacco growers; 

  Activities can be grouped into 5 broad categories: authorisation, record keeping 
and reporting, fiscal markings, financial securities, and inspections and checks; 

  The objective of an authorisation regime is twofold: to select economic 

operators; to maintain an updated overview of the actors involved in excise 
goods; 

  The ability to keep records of tobacco products received/produced/dispatched/ 

released for consumption is an important requirement when it comes to securing 
the payment of the excise duty debt. The level of detail as well as the frequency 
to which information must be reported to tax administration depends on the 
type of economic operator and may vary across the EU. It is greatest in the case 
of warehouse keepers. 

  Data on the stocks and use of fiscal markings can be used to cross-check the 

record submitted by an operator and might be used to estimate excise 
revenues; 

  Financial securities represent a buffer against  potential losses in the conduction 

of an excise business;  

  Physical checks and inspections are conducted either regularly, randomly or on 

the basis of a risk assessment.  

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Q1.5  What  IT  technologies  are  used  by  tax  authorities  to  combat  illicit  trade 
and ensure the collection of tax revenue? 
IT  technologies  play  a  pivotal  role  in  supporting  tax  authorities  in  the  fight  against 
illicit  trade.  The  increasing  use  of  IT  tools  is  unanimously  pointed  at  as  a  means  for 
ensure effective and efficient use of scarce resources such as time and human capital. 
The  present  section  is  dedicated  to  explore  to  what  extent  tax  administrations 
throughout  Europe  make  use  of  IT  technologies.  For  the  purpose  of  clarity,  the issue 
of  data  availability  is  discussed  before  moving  on  to  describing  the  IT  systems 
currently in place for combating illicit trade. A separate subsection is dedicated to the 
discussion of tax marking systems and track and trace systems. 

Questions 

Indicators / Descriptors 

Data sources 

Description of the use of IT 
technologies by MS authorities 

Survey to national tax 
authorities 

Q1.5 Are IT technologies used by tax 
authorities to combat illicit trade and 
ensure the collection of tax revenue? How? 

  What marker types enable coding for 
improved collection of tax revenue 
(through verification, identification, 
monitoring, stock management, 
tracking and tracing)? 

All  tax  administrations  interviewed  stated  that  their  effort  to  curb  illicit  trade  and 
safeguard  the  budgetary  interests  of  the  state  is  inherently  a  resource-consuming 
exercise. Given that resources are by definition scarce, the most widely employed tool 
for  maximising  the  efficiency  and  the  effectiveness  of  the  controls  is  represented  by 
risk  assessment.  Risk  assessment  can  be  defined  as  a  composite  set  of  activities 
aimed at identifying, evaluating and estimating the levels of risks involved in a process 
or  situation  and  at  determining  an  acceptable  level  of  risk.  In  this  context,  IT 
technologies,  i.e.  hardware  and  software  solutions,  serve  the  aim  to  transform  raw 
data into intelligence, i.e. usable information. 

Data sources 
Data  sources  in  the  context  of  excisable  products  can  be  broadly  split  into  two 
categories: supranational-level databases and national-level databases.  

At the supranational level, databases are compiled and made available to national tax 
administration by organisations such as the European Commission, the OLAF, and the 
World  Customs  Organisation  for  the  aim  of  curbing  illicit  trade.  A  non-exhaustive  list 
includes: 

  The Customs Enforcement Network (CEN) system by the World Customs 

Organisation (WCO); 

  The Excise Movement and Control System (EMCS) - a computerised system 

for monitoring the movements of excise goods under duty suspension 
arrangement. The platform includes other web-based applications such as the 
System for Exchange of Excise Data (SEED) a centralised database where 
information on traders who are approved to hold, move or receive goods under 
excise duty suspension is collected; the Early Warning System for Excise (EWSE) 
and the Movement Verification System (MVS). The latter allows for integrating 
the movement of duty-paid goods into EMCS. The platform further allows the 
sharing of control reports and interruption reports which result from physical 
control activities and the exchange pf event, alert and rejection reports; 

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  The Anti-Fraud Information System (AFIS) by OLAF - a secure 

communication system which supports and facilitates the exchange of anti-fraud 
information among the relevant authorities of the Member States and between 
them and the Commission. AFIS encompasses a number of web-based 
applications such as the AFIS Mailing (structured & unstructured 
communications), the Customs Information System (CIS), the FIDE System, the 
Mutual Information System with the Russian Federation (MIS), the virtual-OCU 
supporting Joint Surveillance Operations and the WCO-CigInfo system for the 
exchange of data on seizures of smuggled cigarettes between the Member 
States and the World Customs Organisation. 

  The Customs Information System (CIS) - a common computer network 

system consisting of a database which centralises customs information across 
Member States to help to prevent, investigate and prosecute breaches of 
Community customs or agricultural legislation by facilitating dissemination of 
information and cooperation of authorities across Member States in an effective 
manner. CIS also contains specific information on excise duties and the system 
can therefore be used by excise duty departments to exchange information 
pertinent to their work; 

  The FIDE - an EU-wide database that contains information related to cases 

concerning excise products, and therefore also tobacco products. The database 
consists of files on persons and businesses that have been suspected of or found 
guilty of offences of Community customs legislation. The database is applied in 
connection with new investigations as it allows investigating authorities to 
identify whether a business or person is currently being investigated and has 
been investigated in the past; 

  The New Computerised Transit System (NCTS) - an electronic system of 

declaration which provides fast and efficient processing of transit goods through 
computerization. The system specifically covers all customs duties, like excise 
duties and VAT. In addition, the system has enabled communication and 
coordination between the customs administration with the centralised access to 
data and faster data exchanges; 

  The Export Control System (ECS) and the Import Control System (ICS), 
which represent EU-wide platform for the exchange of customs declarations 
between customs (office of export/import and office of exit/entrance) and 
economic operators for the fulfilment of the obligations related to importing and 
exporting goods into and out of the European Community.  

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EMCS 
EMCS is a computerised system for monitoring the movements of excise goods under a 
duty suspension arrangement within the EU. It was introduced in April 2010 (Milestone 
a), when the paper-based Administrative Accompanying Documents (AADs) and related 
exchanges of information were gradually replaced with electronic Information Exchange 
(IE)  messages  from  the  consignor  to  the  consignee  via  Member  State  administrations. 
Electronic  filing  of  all  EMCS  messages  became  mandatory  from  01/01/2011  (Milestone 
b), meaning the paper-based AADs lost their legal basis from this date.  

The objectives of this system are both to eliminate the weaknesses of the former paper-
based  system  (thus  reducing  the  room  for  fraud)  and  to  provide  all  partners  with 
complementary  services,  in  particular  to  bring  real-time  information  during  the  excise 
movement  to  all  actors  of  the  EMCS  project  community.  Since  1  January  2012 
(Milestone c), the range of functionalities was expanded to include more administrative 
cooperation, 
for  certain 
replacing  e-forms  and  paper-based  communication 
arrangements such as alert or rejection of an e-AD. The EMCS has been fully integrated 
with the SEED. Each time a new trader’s approval  is added to SEED, a unique 13 digit 
reference number is allocated called the ‘Excise ID’ or ‘Excise Registration Number’. The 
Excise  ID  is  recorded  on  the  excise  trader’s  approval  certificate  and  this  enables  each 
excise trader to be uniquely identified. In addition to serving as a database of the excise 
traders, after being  incorporated into  the  EMCS,  SEED  performs  automatic checks  by 
matching the excise numbers of the consignor and of the consignee against the register 
of  operators,  before  the  goods  are  approved  to  move  under  duty  suspension.  If  these 
details  do  not  correspond  with  the  contents  of  the  electronic-Administrative  Document 
(e-AD), then the goods cannot be moved. 

The EMCS is used by more than 80,000 economic operators. 

As  far  as  national-level  databases  are  concerned,  they  are  usually  compiled  for 
customs purposes but they are also used by tax administrations for monitoring excise 
goods. This is the case, among others, of UK’s Customs International Trade and Excise 
(CITEX) and Customs Handling Import and Export Freight (CHIEF) databases.   In EL, 
the  tax  administration  employs  ICISnet,  while  the  Latvian  State  Revenue  Service  is 
currently building a list of companies involved in  the excise field with the specific aim 
to fight illicit trade in excise goods.  

There  are  two  major  challenges  on  the  way  towards  ensuring  a  full  exploitation  of 
the  potential  of  these  data.  The  first  is  represented  by  the  integration  of  different 
sources  into  a  coherent  system.  The  importance  of  this  aspect  is  proved  by  the  fact 
that  one  country  is  currently  undertaking  a  significant  effort  to  build  a  centralised 
database  by  integrating  currently  separated  datasets  regarding  different  aspects  of 
taxation.  The  second  challenge,  which  is  closely  related  to  the  previous  one,  is  to 
make  the  information  intelligible  and  usable.  This  is  precisely  where  IT  technologies 
kick in. 

From raw data to intelligence 
A  variety  of  IT  solutions  have  been  developed  with  the  aim  to  enhance  the  ability  of 
tax  administrations  to  fight  against  illicit  trade  and  to  safeguard  the  budgetary 
interests of the Member States. 

As  pointed  out  before,  platforms  such  as  EMCS  and  AFIS  are  much  more  than 
databases  in  that  they  enable  the  performance  of  a  variety  of  tasks.  The  majority  of 
tax  administrations  interviewed  maintained  that  EMCS  represents  a  significant 
improvement if compared to the previous paper-based system, as it reduces the room 

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for fraud and provides real time information on the movements of excise goods. With 
the  exception  of  two  countries  (NL  and  UK)  where  the  platform  is  currently  being 
optimised  to  allow  for  an  easier  access  and  analysis  of  the  data, in  all  other  Member 
States  tax  authorities  make  systematic  use  of  the  data  contained  in  EMCS  for  risk 
assessment purposes.  

While  acknowledging  the  benefit  accruing  from  the  introduction  of  EMCS,  several 
respondents  highlighted  that  it  is  not  well-suited  for  monitoring  the  flow  of  products 
that never  entered the  legal circuit. In  order to  upgrade  its  functioning, a number 
of proposals have been put forward: 

  Extending the scope of EMCS to include other tobacco products (such as raw 

tobacco) and/or duty-paid tobacco goods; 

  Increasing the level of detail of the information to be provided by economic 

operators, e.g. container numbers, description of the route of movement, brands 
of the tobacco products. At the same time, more thorough controls before 
registering a new economic operator into the SEED would greatly reduce the risk 
of non-genuine businesses; 

  Integrating EMCS with the other national EMCS platforms to identify ties 
between operators and criminal cross-national networks or with customs 
systems (e.g. NCTS, CIS); 

  Extending the functionalities of the system,  for example, by including a uniform 

risk analysis tool or a channel for exchange of information between Member 
States. 

As a consequence, the intelligence work by national tax administration is not limited to 
the analysis of the data provided by  EMCS. On the contrary, data coming from other 
sources  are  integrated  with  each  other  by  using  IT  tools  that  enable  the  creation 
profiles  of  shipments/traders  for  better  targeting  physical  checks.  IT  solutions  for 
performing risk assessment are usually developed at the national level as they need to 
be  customised  and  integrated  into  the  functioning  of  the  tax  administration.  While 
pursuing  the  same  general  objectives,  i.e.  the  detection  and  curbing  of  illicit  trade, 
different technologies might be better suited for certain specific objectives such as: 

  Providing real-time information and reporting on risks: this is the case of the 

data mining procedures performed by ES and PT or the Maltese Customs 
Electronic System (CES)  which includes a module for the real-time monitoring 
of tax warehouses stocks as well as two modules for the movements (import and 
export), populated by information uploaded by economic operators. Daily 
analyses of the volumes of sales of cigarettes are conducted in HR at the retail 
level. In FI, the customs have developed an electronic system that allows for 
identifying certain shipments according to the pre-defined criteria (e.g. tariff 
heading, country of origin/dispatch), so as to be able to better target 
inspections; 

  Enhancing coordination between different departments within the tax 

authority. As an example, PL developed a comprehensive set of tools making use 
of the information available in international-level databases to facilitate the 
exchange of information among Customs Service officers and to coordinate 
inspection activities; 

  Support investigative activity as is the case of AT’s Analyst's Notebook 
software which is used for customs investigations. Similarly, in HU the 
investigative activities are facilitated by the availability of a documentation-
based searching and analysing facility with all the data in connection with misuse 
of excise (tobacco) products.  

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Tax marking system and track and trace systems 
Tax marking systems and track and trace (T&T) systems deserve separate treatment. 
The issue of tax marking has been extensively discussed in a previous section (Q.1.2), 
however  it  is  worthwhile  to  make  a  comparison  between  this  and  a  closely  related 
aspect of the tobacco universe, namely Track and Trace (T&T) systems.  

The  comparison  between  fiscal  marking  systems  and  T&T  systems  can  be  made  at 
different levels. A first level is represented by the objectives the two systems pursue. 
Fiscal marks serve as a proof that excise duty has been in the Member States where 
the  product  is  released  for  consumption.  In  some  countries  (e.g.  RO,  EL),  economic 
operators are required to pay a fee which will then be subtracted from the total duty 
debt. Differently, T&T systems should allow for a systematic monitoring by competent 
authorities  of  the  route  or  movement  taken  by  tobacco  products  through  the 
respective supply chains, both ex-ante (tracking) and ex-post (tracing). Thus, they are 
meant to help in the identification of the points of diversion. Given these differences, 
the two systems are regarded by tax administrations as not mutually excluding and, in 
most  of  the  cases,  as  complementary.  However  the  degree  to  which  complementary 
occurs depends on the technical features of both systems. 

A  second  level  of  comparison  is  represented  by  the  coverage  of  the  two  systems  in 
terms  of  countries  and  tobacco  products.  Tax  marking  systems  are  national-level 
systems whose coverage varies a great deal across Member States: in some countries 
(i.e.  AT,  CY,  FI,  SE)  tax  markings  are  not  used,  while  in  other  countries  they  only 
cover  specific  products  (cigarettes  and  fine-cut  tobacco  in  UK;  cigarettes,  fine-cut 
tobacco  and  other  smoking  tobacco  in  DK),  while  in  others  they  cover  all  types  of 
tobacco  products  (i.e.  EL,  RO,  PL).  T&T  systems  instead  mainly  apply  to  cigarette 
manufacturers  (and  a  few  other  economic  operators).  According  to  the  results  of  the 
survey, it is mainly affiliates to a single transnational tobacco company that apply this 
kind of system.  

The  set  of  information  that  can  be  retrieved  from  the  two  systems  represents 
another level on which the comparison can be performed. Tax stamps, as made clear 
in  Q.1.2,  contain  a  limited  amount  of  information.  For  instance  the  tax  mark  used  in 
RO, which seems to be among the most developed in the EU, contains the name and 
the  SEED  number  (or  Country  code  and  the  VAT  number  in  the  case  of  registered 
consignees) of the economic operator, a generic product code, a unique serial number 
and  a  barcode  which,  if  scanned,  allows  metadata  encrypted  in  the  stamp  to  be 
accessed.  

T&T  systems  should  include  a  wider  set  of  information  such  as  brand  category, 
production date, place  of production, machine/time/shift of manufacturing, market of 
retail  sale,  warehousing  and  shipping.  As  pointed  out  by  Joossens  (2011)    “tracking 
and  tracing  is  more  than  the  unique,  secure  and  non-removable  identification 
markings  on  the  packages  of  tobacco  products.  It  implies  reading  or  scanning  the 
codes, linking the codes between packs, cartons, master cases and pallets, uploading 
the  information  to  a  database,  recording  of  any  shipping  and  receiving  events  along 
the supply chain and interconnecting the different databases”. 171  

In  practice,  the  set  of  information  available  from  the  inventory  and  logistics 
management  systems  used  by  the  big  tobacco  manufacturing  companies  (e.g. 
Codentify)  is  more  limited.  Indeed,  the  12-character  number  contains  information  on 
brand  category,  production  date,  place  of  production,  machine/time/shift  of 

171 Joossens, L, 2011, Industry and Market Response Deliverable 5.2.: Illicit tobacco trade in Europe: issues 
and solutions. PPACTE research project. 

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manufacturing but  does not allow for going further down the value chain than the first 
purchaser. 

A  fourth  level  of  comparison  is  the  technical  specifications.  As  the  design  of  tax 
marks  and  inventory  and  logistics  management  systems  can  vary  a  great  deal,  a 
theoretical  comparison  is  not  possible.  Nevertheless,  it  is  still  interesting  to  compare 
two real-world cases, namely the tax marks used in RO and LV and Codentify. The tax 
mark  employed  by  the  Romanian  tax  administration  consists  of  an  adhesive  stamp 
featuring  a  unique  serial  number,  a  bi-dimensional  bar  code,  a  hologram  against 
counterfeiting and other security features such as background aura and microtext. In 
LV, consumers are given the possibility to get basic information about the product by 
using  the  serial  number  printed  on  the  excise  duty  stamp:  by  typing  the  code  in  a 
special  internet  site  or  by  sending  it  by  SMS  to  a  dedicated  number,  information  on 
the product can be obtained. 

Codentify  instead  consists  of  a  machine-scannable  barcode  labels  (with  human 
readable  translation)  at  the  master  case  level  and  a  unique  encrypted  12-character 
number  to  identify  and  authenticate  the  product.  Information is  stored in  a  database 
to which tax administrations might be granted access based on bilateral agreements. 
One tax administration pointed out that economic operators have only granted access 
to a limited set of information that only enables users to verify the authenticity of the 
product.  Another  respondent  made  clear  that  as  codes  are  visible  they  can  be  easily 
reproduced  and  placed  on  counterfeited  goods.  Moreover,  codes  at  the  pack,  carton 
and master case level are not linked to each other.  

The  information  contained  in  a  fiscal  mark  and/or  those  made  available  by  existing 
inventory  and  logistics  management  systems  is  (or  has  the  potential  to  be)  used  for 
combating illicit trade. In countries like BE, EE, HR and HU, electronic data on use 
of tax stamps are used in combination with the system for the declaration of payment 
to secure the collection of revenues. As for T&T systems, the practical experiences of 
countries  are  highly  heterogeneous:  one  country  reported  that  they  are  finalising  a 
piloting  phase  with  Codentify  and  see  a  great  potential  for  improvement  of  their 
effectiveness in identifying illicit trade, while another country reported that they have 
been provided with the devices to read the bar code but the information available is of 
scarce utility.  

At the same time, as many as 15 respondents pointed out that T&T systems have the 
potential  to  enhance  the  ability  of  tax  administration  to  fight  against  illicit  trade 
provided that:  

  The T&T system has a global coverage including countries such as Brazil, India 

and China where part of the counterfeited products originate; 

  A balance should be stricken between information needs and burden on tax 

administrations and operators; 

Other  countries  are  more  sceptical  of  the  utility  of  T&T  systems.  Some  maintain  that 
they  would  not  allow  for  monitoring  or  gaining  intelligence  on  counterfeit  or  illegally 
manufactured tobacco products which never entered the legal circuit. Others regard as 
a major limitation of the systems that it is not possible for consumers to use them to 
find out if the product is genuine. Finally, some fear that  such  a system would entail 
excessive costs.  

Joossens  (2011)  claims  that  until  2004  the  transnational  tobacco  companies  (TTCs) 
were  heavily  involved  in  cigarettes  smuggling  in  Europe.  This  led  the  European 
Commission to file a civil action in New York against Philip Morris and RJ Reynolds in 
November 2000. In the subsequent decade, the European Union reached agreements 

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with all the major TTCs in the field of controlling illicit trade of cigarettes. One of the 
arrangements  commits  the  companies  to  undertake  “commercially  reasonable  efforts 
to  implement  product  tracking  and  tracing  measures.”172  OLAF,  the  European 
Commission’s  Anti-Fraud  Office,  has  been  entrusted  with  the  supervision  of  the 
agreements  and  endowed  with  the  power  to  impose  sanctions  in  case  of  failures  to 
meet the targets. 

At  present,  TTCs  apply  unique,  machine-scannable  barcode  labels  (with  human 
readable translation) at the master case level for all of the factories belonging to the 
signatory parties. The coded information includes: brand category, product date, place 
of  production,  the  machinery,  the  shift  and  the  exact  time  of  manufacturing.  At  the 
same  time,  the  industry  reached  an  agreement  to  adopt  PMI’s  in-house  marking 
system on cigarettes packs, known as Codentify. This verification system consists of a 
unique  encrypted  12-character  number  to  identify  and  authenticate  a  pack  of 
cigarettes.  This  system  is  already  in  use  on  some  countries,  among  which  France, 
Germany, Italy, Netherlands, Portugal, Spain and Sweden.173 

The identified weaknesses of the current systems relate to: 

  The visibility of the unique labelling of cartons makes it easy for smugglers to 

decrypt (and replicate) the complete marking; 

  The lack of any link between the codes reported on packs, cartons, master cases 

and pallets through which a parent-child relationship can be established; 

  The pivotal role paid by the interested economic operators in collecting and 

managing the information. 

Summary 
Our  analysis  of  the  IT  technologies  used  by  Member  States  authorities  to  ensure  the 
collection of tax revenues provides the following key findings: 

  The most widely employed tool for maximising the efficiency and the 

effectiveness of the controls is represented by risk assessment; 

  Data sources in the context of excisable products can be broadly split into two 
categories: supranational-level databases and national-level databases. There 
exist two major challenges, namely the effective integration of different sources 
into a coherent system and the creation of intelligence from raw data;  

  IT solutions for performing risk assessment are usually developed at the national 
level as they need to be customised and integrated into the functioning of the 
tax administration; 

  The information contained in a fiscal mark and/or those made available by T&T 
systems is (or has the potential to be) used for combating illicit trade however 
the degree of complementarity/substitution of the two systems varies across 
Member States. Also, opinions on the potential development for T&T systems 
differ across the EU. 

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Appendix 6 – Research note on e-cigarettes 

What are e-cigarettes? 
An electronic cigarette, commonly referred to as e-cigarette or even e-cig, is a hand-
held  battery-powered  device  consisting  of  an  atomizer,  a  battery  and  a  disposable 
cartridge.  Contrary to  ordinary cigarettes,  e-cigs do not work through  combustion, in 
fact they use heat to  vaporise the solution in  the cartridge and create an aerosol (or 
mist) that the vaperinhales.174  Some of the devices are featured with a LED to mimic 
the glow of a real cigarette, while the humectants in the liquid are used to produce the 
vapour. The design of the device is an important feature of the product. For instance, 
a  post  in  blog  specialized  on  e-cigarettes,  when  commenting  on  a  new  type  of  e-
cigarette  introduced  by  BAT  stated  that  “[the  e-cigarette]  was  designed  to  look  and 
feel  like  a  real  tobacco  cigarette.  It’s  exactly  the  size  of  a  cigarette,  it’s  very 
lightweight,  the  LED  tip  lights  up  red  when  the  device  is  in  use  and  the  filter  is  soft 
and squishy like that of an analog.”175 

As  reported  by  Palazzolo  (2013),    who  conducted  an  extensive  review  of  the  existing 
literature on e-cigarettes, cartridges contain a relatively small number of substances if 
compared  to  traditional  tobacco  products.  176  Cahn  and  Siegel  (2011)  claim  that  “we 
already  have  more  comprehensive  knowledge  of  the  chemical  constituents  of 
electronic  cigarettes  than  tobacco  ones”,  177  and  indeed,  only  a  small  fraction  of  the 
estimated 10,000 to 100,000 chemicals in cigarette smoke have ever been identified. 
On the contrary, the solution in the cartridges is mostly made of propylene glycol 178 or 
glycerol  (up  to  90%),  flavourings,  nicotine  and/or  other  medications.  Nicotine  is  a 
potent  psychoactive  drug  that  stimulates  the  production  of  neurotransmitters  like 
dopamine  and  it  is  the  main  responsible  for  the  sensation  of  reduced  stress  and 
improved  wellbeing  that  smokers  report  to  experience  when  they  light  a  cigarettes 
(Palazzolo 2013). The nicotine content can range between 0 and 48 mg/ml according 
to  the  consumer’s  taste.  The  liquid  does  not  contain  tobacco  except  for  minuscule 
quantities  either  due  to  the  tobacco  flavouring  or  to  the  process  of  extraction  of 
nicotine from tobacco leaves. 

E-cigarettes  are  intended  to  imitate  ordinary  cigarettes  not  only  in  their  appearance 
but also in their reproducing the “hand-to-mouth” movement. Hence, their use, which 
is often mistakenly compared to that of nicotine replacement therapies (NRT), retains 
a physical and psychological aspect deemed important to smokers. Moreover, as NRTs 
entail  a  controlled  release  of  nicotine  into  the  body  by  means  of  patches,  gums, 
sublingual tablets, inhalers and lozenges, they lack the traditional “nicotine hit” which, 
on the contrary, is found in vaping.179 

Use of e-cigarettes 
The use and marketing of e-cigarettes is the matter of a contentious debate between 
legislators  on  one  side,  and  e-cigarette 
regulatory  agencies,  governments, 

174 Vaper is the term used to describe the users of e-cigarettes, analogues to “smokers” in relation to 
traditional cigarettes 
175 Vape Ranks. http://vaperanks.com/europes-largest-tobacco-cigarette-maker-launches-its-own-e-
cigarette/ 
176 Palazzolo, Dominic L. 2013. Electronic cigarettes and vaping: a new challenge in clinical medicine and 
public health. A literature review. Frontiers in Public Health 1 (56) 
177 Cahn, Zachary, and Michael Siegel. 2011. ”Electronic cigarettes as a harm reduction strategy for tobacco 
control: A step forward or a repeat of past mistakes?” Journal of Public Health Policy 32(1): 16-31. 
178 This solvent is used in food processing, cosmetics, pharmaceutical products. 
179 The action of inhaling the vapour generated by the heating of the liquid is commonly referred to as 
vaping to distinguish it from smoking, which entails combustion. 

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manufacturers and distributors on the other. For instance, in the US e-cigarettes were 
initially  marketed  as  smoking  cessation  tools  and  cheaper  and  safer  alternatives  to 
tobacco  products  before  the  Food  and  Drug  Administration  (FDA),  the  US  regulatory 
agency,  issued  some  distributors  a  letter  for  “violation  of  good  manufacturing 
practices”  motivated  by  the  fact  that  they  were  making  “unsubstantiated  drug 
claims”180.  

In a 2012 Eurobarometer survey,181 more than two thirds of Europeans were found to 
know about the existence of e-cigarettes, 46% knew what this device is and 7% had 
already  tried  it  at  least  once.  Interestingly,  an  earlier  version  of  the  Eurobarometer 
survey  conducted  in  2006182  did  not  even  mention  the  term  “e-cigarette”.  Another 
survey investigating the perceptions of Europeans about tobacco conducted in 2010183 
found  that  3%  of  the  citizens  tried  products  containing  nicotine  (but  not  tobacco), 
such  as  drinks  and  e-cigarettes,  at  least  once.  The  questions  asked  allowed  for 
recreating  the  profile  of  the  average  nicotine  users:184  they  are  mainly  smoker  or  ex-
smoker males, aged between 25 and 39, with a medium level of education. Similarly, 
data from an open answer questionnaire posted on popular blogs and websites about 
e-cigarettes  and  smoking  cessation  (Etter  2010185)  found  that  vapers  are  relatively 
young (37 years old) males (77%) most of whom were former smokers. Moreover, the 
study  found  that  users  took  175  puffs  per  day  (median  value)  and  the  preferred 
flavour was tobacco. Another study (Suftin et al 2013186) surveyed 4444 students from 
eight North Caroline colleges and found that 12% of those reporting to have used an 
e-cigarette  had  never  been  smokers,  while  69%  were  either  smokers  or  former 
smokers.  Among  those  who  never  tried  the  device,  figures  are  53%  and  37% 
respectively.  

Surveys among vapers found that it is not uncommon for them to regard the use of e-
cigarettes as either an NRT to help reducing or quitting the habit or as a less harmful 
alternative  to  tobacco  cigarettes.  In  an  internet  survey  conducted  in  Etter  (2010) 
among 81 e-cigarette users, respondents indicated the following reasons as being the 
main  ones:  quit  smoking,  reduce  the  cigarette  consumption,  not  to  disturb  other 
people and to be able to smoke in smoke-free environments. Some studies reported in 
Palazzolo  (2013)  found  that  vaping  reduced  the  consumption  of  traditional  cigarettes 
by 80% after 6 months and 50% after 24 months, while other works  reported in the 
same  paper  are  less  optimistic  of  the  effectiveness  of  e-cigarettes  as  a  smoking 
cessation aid. Even though Etter (2010) claims that e-cigarettes have “the potential to 
be as effective as currently approved Nicotine Replacement Therapy (NRT) products”, 
since they allow nicotine to rapidly enter into the blood (through the lungs) and they 
retain the psychological aspects of smoking, the absence of scientific evidence induced 
regulatory  agencies  to  take  a  cautious  stance.  The  FDA  and  the  World  Health 
Organization  warned  companies  against  making  any  therapeutic  claim  on  their 
products.  Still,  the  fact  that  distributors  present  them  as  an  alternative  to  smoking 
more or less implicitly suggests that e-cigarettes can be used as a cessation aid (Etter 
2010). 

Moreover,  the  attractive  design  and  the  possibility  to  use  them  (when  not  explicitly 
prohibited)  in  smoke-free  environments  make  e-cigarettes  an  appealing  recreational 

180 Palazzolo (2013), p.1 
181 Eurobarometer. 2012. Attitudes of Europeans towards Tobacco. Special Eurobarometer 385. 
http://ec.europa.eu/public_opinion/archives/ebs/ebs_385_en.pdf 
182 Eurobarometer. 2007. Attitudes of Europeans towards Tobacco. Special Eurobarometer 272 
183 Eurobarometer. 2010. Tobacco. Special Eurobarometer 332. 
http://ec.europa.eu/health/tobacco/docs/ebs332_en.pdf 
184 The group also contains people that used nicotine drinks, not only e-cigarettes 
185 Etter, Jean-Françoi. 2010. Electronic cigarettes: a survey of users. BMC Public Health 10:231 
186 As in Palazzolo (2013) 

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activity.  According  to  qualitative  data  from  focus  groups  of  vapers  in  Barbeau  et  al 
(2013),187  social  and  behavioural  aspects  are  important  components  of  smoking 
addiction,  including  the  use  of  e-cigarettes.  The  study,  while  acknowledging  the 
limitation  of  the  research  strategy  based  on  self-selected  vapers  responding  to  an 
invitation  posted  on  a  popular  blog,  suggests  that  vaping  is  regarded  as  a  hobby,  a 
topic  of  discussion  in  online  forums,  and  the  object  of  ad  hoc  “vaping  clubs”. 
Furthermore, it is reported to yield social benefits in the form of a sense of belonging 
to  a  (online)  community  where  you  can  “ask  question  and  find  support  and 
encouragement from fellow users.”188 The very fact that users call themselves “vapers” 
and not “smokers”, suggests that a redefinition of the personal identity has occurred.  

Size and structure of the market  
E-cigarettes  were  first  patented  in  2003  in  China  by  Hon  Lik,  a  pharmacist,  and 
became  widely  available  in  the  US  starting  from  2006.  Between  2010  and  2012,  the 
market has grown exponentially registering a compound annual growth rate of 57% 189 
and  gained  the  interest  of  many  long-term  smokers.  This  robust  growth  trajectory  is 
expected  to  continue  in  the  near-to-medium  term  and  it  may  lead  the  market  to  hit 
the  threshold  of  US$3.3  billion  in  sales  by  2015.190  According  to  tobacco  industry 
analyst  Bonnie  Herzog  of  Wells  Fargo,  a  bank,  the  market  currently  stands  at  about 
USD  2  billion  worldwide191  and  has  the  potential  to  overtake  sales  of  the  ordinary 
products  within  a  decade.192  According  to  the  economic  press,  in  2012  alone,  the  US 
market doubled its size increasing its revenues from $250M to $500M.193 According to a 
report  issued  by  the  European  Parliament’s  Library  (Erbach  2013)  based  on  a  2009 
study  commissioned  by  the  Executive  Agency  for  Health  and  Consumer,194  the  EU 
market alone is worth between €400 and €500 million. The same figures are reported 
in  a  study195  conducted  by  Roland  Berger,  a  consultancy  firm,  for  PMI,  and  a  study 
carried out for the Commission in 2012.196  

While the market is still populated by a high number of small and medium enterprises 
(Erbach  2013197),  economic  newspapers198    report  that,  at  least  in  the  US,  a 
concentration process is under way with the three biggest companies controlling 85% 
of the market. In addition to pioneer, independent companies like Joytech, Logic, Njoy 
and Vapor, traditional tobacco companies (also referred to as Big Tobacco) have been 

187 Barbeau, Amanda M., Jennifer Burda, and Machael Siegel. 2013. Perceived efficacy of e-cigarettes versus 
nicotine replacement therapy among successful e-cigarette users: a qualitative approach. Addiction Science 
and Clinical Practice, 8:5. 
188 Ibid, p.3 
189 Wharton, University of Pennsylvania. http://knowledge.wharton.upenn.edu/article/e-cigarettes-lighting-
france-beyond/ 
190 Ibid 
191 As reported in Washington Post, 
http://www.washingtonpost.com/blogs/govbeat/wp/2013/10/29/awaiting-fda-states-pursue-their-own-e-
cigarette-rules/  
192 As reported in The Economist, http://www.economist.com/news/business/21573985-challenge-big-
tobacco-vape-em-if-you-got-em  
193 As reported in Business Insider. http://www.businessinsider.com/how-a-tax-court-decision-could-lead-
to-the-rise-of-the-e-cigarette-era-2013-3#ixzz2qVWPAc1V 
194 Matrix Insight. 2009. Economic analysis of the EU market of tobacco, nicotine and related products. 
http://ec.europa.eu/health/tobacco/docs/tobacco_matrix_report_eu_market_en.pdf 
195 Roland Berger. 2013. The New Tobacco Products Directive- Potential Economic Impact. 
196 European Commission, SWD(2012) 452 final and COM(2012) 788 final; Directive of the European 
Parliament and of the Council on the approximation of the laws, regulations and administrative provisions of 
the Member States concerning the manufacture, presentation and sale of tobacco and related products. 
197 Erbach, Gregor. 2013.Electronic cigarettes, Library Briefing, Library of the European Parliament. 
 http://www.europarl.europa.eu/eplibrary/Electronic-cigarettes.pdf 
198 
booming-e-cigarette-market/ and Washington Post,  
http://www.washingtonpost.com/blogs/govbeat/wp/2013/10/29/awaiting-fda-states-pursue-their-own-e-
cigarette-rules/  

http://www.forbes.com/sites/danielfisher/2013/10/02/will-taxes-and-regulation-rein-in-the-

Forbes, 

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investing  in  this  market  since  2011  by  purchasing  already  established  e-cigarette 
manufacturers  or  by  developing  their  own  lines  of  product.  As  early  as  2011,  JTI 
invested  in  a  San  Francisco-based  company  producing  a  nicotine  vaporiser  called 
Ploom.199  The  device  is  described  as  being  neither  a  conventional  nor  an  electronic 
cigarette  as  it  heats  tobacco  contained  in  pods  at  a  constant  temperature  and 
vaporizes the nicotine and the flavouring without burning it.200 Lorillard Inc., the third 
largest  tobacco  player  in  the  US,  acquired  the  brand  Blu  eCig  in  2012  for  $135 
million201 and SKYCIG, a UK-based premium e-cigarettes brand in 2013.202 According to 
market  analysts,  this  move  secured  the  company  a  leading  role  in the  global  market 
with  a  reported  share  of  49%.203  BTI,  in  addition  to  acquiring  CN  Creative  Limited,  a 
the  development  of  e-cigarette 
UK-based  start-up  company  specialised 
technologies.204  launched  its  own  brand  in  the  UK  (Vype)  in  2013.  PMI  has  been 
reported  to  enter  the  market  during  the  second  half  of  2014,  while  the  Altria  Group, 
previously  Philip  Morris  Companies  Inc.  and  the  producer  of  Marlboro,  created 
MarkTen  which  was  put  on  sale  in  Indiana  in  2013.  Reynolds  American  Inc.,  the 
second largest tobacco player in the US, launched its Vuse e-cigarettes and succeeded 
in gaining a 55.6% market share in Colorado in less than 20 weeks.205 It remains open 
to  discussion  whether  the  decision  of  investing  in  the  business  is  determined  by  the 
willingness to avoid competition or by the belief that e-cigarettes represent the future 
in  the  tobacco  industry.  The  EU  market  is  characterised  by  a  large  number  of 
distributors rather than manufacturers.  Many of these are still SMEs, but the interest 
is  growing  from  bigger  companies  to  enter  into  this  business.  Similar  to  the  moves 
observed from Philip Morris International, British American Tobacco has also launched 
its own subsidiary with the purpose of developing non-tobacco nicotine products.206 

in 

The rapid expansion of the market has been made possible by the extensive use of e-
commerce  that  has  long  represented  the  preferred  (and  exclusive  in  the  early  days) 
distribution channel. More recently, specialised boutiques have been opening in many 
cities. According to a report by the French Office for Tobacco Prevention,207 in the city 
of  Paris  there  are  100  dedicated  stores  and  the  number  is  expected  to  grow. 
Moreover,  where  not  banned  or  strongly  regulated,  e-cigarettes  are  also  sold  in 
convenience  store,  pharmacies  and  consumer-electronics  stores  making  them  easily 
available to consumers.  

A hot public policy debate 
The sudden boom registered by the e-cigarette market found governments, legislators 
and  regulatory  agencies  around  the  world  unprepared  as  the  legislation  in  place  did 
not allow for  classifying these products in a univocal way. As a consequence,  current 
attempts  by  public  authorities  to  regulate  the  phenomenon  (i.e.  to  agree  on  how  to 
classify  this  product)  have  sparked  a  contentious  debate.  In  the  US,  the  FDA  is  still 
conducting the necessary analysis and a substantial package of regulation is expected 
to be issued in 2014. In the meantime, a cautious approach has been taken by having 

199  Bllomberg  Businessweek.  http://www.businessweek.com/articles/2013-11-21/plooms-e-cigarettes-
vaporizers-use-real-tobacco 
200  JTI  Press  Release.  http://www.jti.com/media/news-releases/jti-macdonald-corp-reaches-an-agreement-
regarding-illicit-trade-of-cigarettes-in-canada-2/ 
201 Lorillard Inc. http://investors.lorillard.com/phoenix.zhtml?c=134955&p=irol-
newsArticle_print&ID=1687024&highlight= 
202  Forbes,  http://www.forbes.com/sites/agoodman/2013/12/05/e-cigarettes-are-smoking-hot-4-ways-to-
approach-them/  and  The  Wall  Street  Journal,  http://blogs.wsj.com/corporate-intelligence/2013/11/18/big-
tobacco-begins-its-takeover-of-the-e-cigarette-market/  
203 Ibid 
204 British American Tobacco. 
http://www.bat.com/group/sites/UK__3MNFEN.nsf/vwPagesWebLive/DO935CVT?opendocument&SKN=1 
205 Ibid 
206 European Commission, SWD(2012) 452 final and COM(2012) 788 final; pp.16-17. 
207 As reported in http://knowledge.wharton.upenn.edu/article/e-cigarettes-lighting-france-beyond/ 

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manufacturers and distributors abstain from making any therapeutic claim about their 
products.  In  the  absence  of  a  federal-level  framework,  states  are  pursuing  their  own 
strategies.  In  Utah,  a  Republican-sponsored  bill  was  presented  for  discussion  at  the 
chamber  for  taxing  e-cigarettes  at  a  level  that  would  have  brought  them  closer  to 
cigarettes  and  in  line  with  other  tobacco  products  such  as  cigars,  roll-your-own 
tobacco and pipe tobacco.208 Other states are expected to follow. 

the  EU, 

the  European  Commission  conducted  an 

In 
impact  assessment 209 
accompanying  a  proposal  for  a  directive  modifying  the  current  Tobacco  Product 
Directive.210  Discussions  have  been  going  on  between  the  Council  and  the  European 
Parliament. Member States agreed on a compromise text in December 2013 that has 
been presented at a meeting after the Parliament decided that e-cigarettes should be 
regulated  but  not  be  subject  to  the  same  rules  as  medicinal  products.211  At  present, 
just like in the US, the situation looks patchy  with different Member  States taking as 
different  stands  as  a  complete  ban  on  the  sale  of  the  product  (e.g.  Greece)  and  free 
availability (e.g. UK and Germany). A full overview of the treatment of e-cigarettes in 
the EU is seen below in Table 31 Treatment of e-cigarettes in the EU. 

Table 31 Treatment of e-cigarettes in the EU212 

Treatment: 

Tobacco 
product 

Medical device/ 
product 

Member 
State: 

BE and LU 

AT, DE, DK, 
EE, HU, SE, 
FI, PT, LU 
and BE 

No specific 
Provisions 
/Consumer 
product (apart 
from general 
product safety 
legislation) 

CY, DE, EE, 
HU, FI, CZ, 
MT, ES, IE, 
NL, LV, PL, 
RO, SI, SK 
and UK 

Comments: 

E-cigarettes are to be treated the same as tobacco cigarettes if 
they contain tobacco extract (if only containing nicotine, BE and LU 
treat e-cigarettes as a medical product) 

EE treats e-cigarettes as a drug/medicine if containing nicotine and 
requires some sort of registration (e.g. pharmacy). In SE e-
cigarettes are not taxed but classified as pharmaceuticals and 
require an approval. In FI, e-cigarettes are not considered an 
excisable product as not containing tobacco. If, however, it 
contains more than a certain limit of nicotine, then the ampule is 
treated as a medical product. In DE, e-cigarettes are treated as 
medical devices if they contain nicotine. 

In these Member States, e-cigarettes are not subject to the excise 
duty legislation and are in free circulation. In EE and HU, e-
cigarettes are treated as a consumer product as long as they do 
not contain nicotine.  

In FI, this product is treated as a normal consumer product if the 
nicotine level is below the threshold, still imposing a consumption 
tax on the ampule. In CZ e-cigarettes are regulated under the 
health legislation. ES report that e-cigarettes are not taxed if not 
combusting. If, however, the product is intended for smoking and 
combusts, it will be taxed. Currently IE has limited experience with 
e-cigarettes in the market and express concern as to how to treat 
it in the future. In PL no excise duty is payable on e-cigarettes. 

208 According to the website of the State of Utah, the bill was eventually turned down in March 2013. 
209 European Commission, Impact assessment accompanying the document Proposal for a Directive Of The 
European Parliament And Of The Council on the approximation of the laws, regulations and administrative 
provisions of the Member States concerning the manufacture, presentation and sale of tobacco and related 
products. SWD(2012) 452 final 
210 Directive 2001/37/EC of the European Parliament and of the Council on the approximation of the laws, 
regulations and administrative provisions of the Member States concerning the manufacture, presentation 
and sale of tobacco products of 5th June 2001 
211 European Parliament. Press release. http://www.europarl.europa.eu/news/en/news-
room/content/20131004IPR21539/html/Tobacco-larger-warnings-flavours-banned-e-cigarettes-regulated 
212 In three countries has not been possible to identify the treatment of e-cigarettes either due to conflicts 
among sources (e.g. LT, HR) or because the relevant law is under development (EL). In EL the manufacture, 
sale,  promotion,  marketing,  and  sale  of  e-cigarettes  is subject  to  licencing  however  the  Ministry  of  Health 
has not issued the decree defining the process yet. 

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Treatment: 

Member 
State: 

Comments: 

Substitute for 
tobacco 
products 

IT 

However, PL has banned their advertising. In CY and SK, 
classification is under CN code 8543 according to Regulation (EC) 
no.1143/2008. 

In IT, e-cigarettes are considered a surrogate product, i.e. a 
substitute, for tobacco products. According to the law, starting 
from 1 January 2014, products (containing nicotine or other 
substances) suited for substituting the consumption of 
manufactured tobaccos together with the mechanic and electronic 
devices (including spare parts) which make their consumption 
possible are subject to a consumption tax equal to 58.5% of the 
retail selling price.” Moreover, economic operators need to comply 
with the same requirements as those applicable to warehouse 
keepers dealing in tobacco products.  

Source: Survey to national tax administrations 

E-cigarettes are not treated as an excisable product in any Member States today, even 
though in the case of IT the consumption tax produces similar effects to the imposition 
of  an  excise  duty  and  is  aimed  at  aligning  the  treatment  to  that  of  cigarettes.    The 
regulation  and  treatment  varies  in  the  Member  States,  from  being  banned  to  being 
regarded as a normal consumer good, which does not require any registration at all. 

Just  like  the  other  tobacco  products,  e-cigarettes  have  propelled  a  heated  policy 
debate  which  touches  upon  many  different  aspects  such  as  classification,  taxation, 
health issues, quality and safety. These are analysed in depth below.  

Categorization 
As  pointed  out  by  Etter  et  al  (2013),    the  success  of  e-cigarettes  poses  a  structural 
challenge  to  current  legislation  that  allows  nicotine  only  in  tobacco  products  and 
nicotine medications which are both subject to specific laws.213 According to Article 2(1) 
Council  Directive  2001/37,  tobacco  products  are  defined    as  “products  for  the 
purposes of smoking, sniffing, sucking or chewing, inasmuch as they are, even partly, 
made  of  tobacco,  whether  genetically  modified  or  not”.  Palazzolo  (2013)  reports  that 
only trace amounts of tobacco are present in liquids with tobacco flavouring. According 
to the same author, the decision by the US Court of Appeals to classify e-cigarettes as 
smokeless tobacco product subject to the same rules and regulations of other tobacco 
products is contentious. In the case of the EU such a decision would entail restrictions 
on  sales,  marketing  and  advertising,  and  would  require  the  product  to  be  subject  to 
heavy excise duties. This would undermine the price advantage e–cigarettes currently 
enjoy over traditional cigarettes. 

In the EU, the legislation in place is not clear about what should be taxed. On the one 
hand, Article 2 Council Directive 2011/64/EU refers to the presence of tobacco as the 
discriminating  factor.  However,  on  the  other  hand,  Article  3(1)  of  Council  Directive 
2001/37/EC, while not engaging directly with taxation, mentions other substances, i.e. 
tar,  nicotine,  and  carbon  dioxide.  In  the  case  of  e-cigarettes  this  latter  limit  is  only 
partially applicable as none of the papers  consulted mentioned the presence of tar in 
e-cigarettes and only one reported very little concentrations of carbon monoxide. The 
only  anchorage  would  be  represented  by  nicotine  which  is  present  in  virtually  all  e-
cigarettes  and  refill  liquids.  According  to  Etter  et  al  (2013),  the  rise  of  e-cigarettes 
gives the opportunity to open the debate on the role of nicotine in the society and to 
revise the regulatory framework for a wide array of harmful products including tobacco 

213 Etter at al.; Analysis of refill liquids for electronic cigarettes, Addiction 2013, p 1671-1679 

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products.  Other  authors  (Chapman  2013214)  and  anti-tobacco  activists  fear  that 
allowing  e-cigarettes  a  competitive  advantage  gainst  traditional  tobacco  products  by 
excluding them from the tobacco product category may become “the tail that wags the 
dog of tobacco control policy, putting at risk the massive gains we have achieved.”215 

As  reported  in  Erbach  (2013),  fourteen  Member  states  regard  at  least  some  e-
cigarettes  or  e-liquids  as  “medicinal  products  by  function,”216  thus  creating  a  level 
playing field between these and the  other NRTs. According to the impact assessment 
conducted  by  the  Commission,  regulating  e-cigarettes  in  this  fashion  would  increase 
their safety by requiring industrial processes to comply with stricter parameters, would 
make  them  less  accessible  to  smokers  and  would  require  manufacturers  to  obtain  a 
marketing  authorisation.  However,  the  classification  has  been  challenged  in  court 
several  times.  The  Tartu  Administrative  Court  (Estonia),  the  Gerechtshof's-
Gravenhage  Court  (the  Netherlands),  the  Cologne  Administrative  Court  and  the 
Sachsen-Anhalt Higher Administrative Court (Germany) all ruled against regulating e-
cigarettes as medicinal products. The scientific community is split on the issue as the 
work conducted so far does not allow drawing final conclusions on the health risks of 
vaping and on the effectiveness of e-cigarettes as a smoking cessation aid.  

A third option would be to classify e-cigarettes as consumer products which, according 
to  Erbach  (2013),  is  the  industry’s  most  preferred  one.  This  would  amount  to 
subjecting  the  product  to  the  General  Product  Safety  Directive  (Council  Directive 
2001/95/EC217).  However,  the  absence  of  restrictions  on  the  design,  packaging  and 
promotion  is  thought  to  be  counterproductive  to  the  objective  of  “denormalising”  the 
use of tobacco. 

Finally,  the  product  might  be  granted  separate  treatment  as  advocated  by  Michael 
Siegel, an American tobacco-control expert, whereby “companies and products would 
be registered with the competent authority, all ingredients would be declared, and the 
purity and safety of products would have to be demonstrated.”218 
Taxation   
Excise duties are indirect taxes on the consumption or the use of certain products. All 
EU member states apply excise duties to at least three categories of products, namely 
alcoholic  beverages,  manufactured  tobacco  products  and  energy  products.219  A  first 
rationale  for  applying  taxes  on  certain  goods  and  services  is  to  be  found  in  the 
relatively inelastic demand for that product which makes it an easy source of revenue 
(Chaloupka  and  Kenneth  1999)220.  In  the  case  of  tobacco  products  in  addition  to  the 
revenue  generating  capacity,  the  willingness  by  the  public  authority  to  influence  (i.e. 
decrease)  the  level  of  the  demand  coming  from  consumers  has  also  represented  a 
main  driver  especially  in  more  recent  years.  As  maintained  by  modern  economic 
theory, consumers’ choices on how to spend their money lead to an efficient allocation 
of an economy’s resources under two conditions: that consumers are rational and fully 

214  Chapman,  Should  electronic  cigarettes  be  as  freely  available  as  tobacco  cigarettes?  No,  BMJ:  British 
Medical Journal 346 (2013) 
215 Ibid, p.2 
216 According to an Orientatio note published by DG SANCO in 2008, a product is regarded as a human 
medicine by function in so far as it qualifies as ”restoring, correcting or modifying physiological functions in 
a significant manner. Differently, it should be regarded as a human medicie by presentation if it is presented 
as a remedy to get rid of nicotine addition, Available at: 
http://ec.europa.eu/health/ph_determinants/life_style/Tobacco/Documents/orientation_0508_en.pdf 
217 Directive 2001/95/EC of The European Parliament And of The Council of 3 December 2001 on general 
product safety 
218 Erbach (2013), p.6 
219 Europa Website. 
http://ec.europa.eu/taxation_customs/taxation/excise_duties/gen_overview/index_en.htm 
220 Chaloupka, Frank J, and Kenneth E. Warner. 1999. The Economics of Smoking. In the The Handbook of 
Health Economics , Joseph Newhouse and Anthony Culyer, editors 

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informed  about  the  costs  and  the  benefits  of  their  choice;  and  that  all  costs  are 
internalized  (Cnossen  2006221;  World  Bank  1999222).  Evidence  suggests  that  neither  of 
these  is  fully  satisfied.223  For  instance,  the  rationality  assumption  ceases  to  be  valid 
when  consumers  act  myopically  by  discounting  the  net  benefits  in  the  near-term 
future more than those in the long-term (Cnossen 2006224). Information failures occur 
every time consumers do not possess the full set of information concerning the risks, 
costs  and  benefits  of  their  choices  thus  they  fail  to  properly  factor  them  in. 
Furthermore,  external  costs  are  present  and  include  the  direct  medical  costs  of 
preventing, diagnosing, and treating smoking-related diseases (affecting both smokers 
and  non-smokers)  and  the  indirect  mortality  costs  related  to  the  loss  of  future 
earnings  due  to  premature  death  of  smokers  (Chaloupka  and  Kenneth  1999).  These 
facts point to market failure and call for a public intervention.  

Taxes represent one of the tools public authorities can resort to in order to correct the 
resource misallocation by reducing the divergence between the private and the social 
costs  of  smoking  (Pigouvian  tax)  and  by  filling  the  informational  gap.  The 
effectiveness of taxes in steering the behaviour of consumers depends on two factors: 
the degree to which taxes are passed  on to  final consumers in the form  of increased 
prices  (which  in  turn  depends  on  the  relative  price  elasticity  of  the  demand  and  the 
supply)  and  the  price  elasticity  of  the  demand  for  the  product.  According  to  the 
WHO,225  there  is  compelling  empirical  evidence  that  an  increase  in  taxes  on  tobacco 
products  translates  into  an  increase  in  prices.  Several  studies  (Lewit  and  Coate 
1982226; Keeler et al 1993227) demonstrated that excise duties are effective in reducing 
the  consumption  of  tobacco  products  as  the  price  elasticity  of  demand  is  negative 
ranging between -0.3 and -0.6 meaning that a 10 per cent increase in the rate would 
translate  into  a  decrease  of  the  demand  by  3%  to  6%.  In  a  comparable  study 
conducted  by  the  World  Bank  between  1997  and  1999  involving  40  economists, 
epidemiologists and tobacco control experts, the elasticity is found to be around -0.4228 
in  high-income  countries  and  taxes  are  reported  to  be  the  single  most  effective 
intervention  to  reduce  demand.  Lewit  and  Coate  (1982) 229  also  found  that  a  tax-
induced  increase  in  prices  operates  on  the  decision  to  smoke  rather  than  on  the 
quantity. No comparable studies have been found for e-cigarettes and the reason may 
be  due  to  the  relatively  recent  explosion  of  the  phenomenon  and  the  scarcity  of 
quantitative data.  

Given  these  premises,  it  remains  open  to  debate  whether  there  exists  a  basis  for 
imposing a tax on e-cigarettes. In the case of tobacco products negative health effects 
(e.g.  lung  cancer,  ischemic  heart  diseases,  emphysema,  chronic  bronchitis,  strokes) 
are well documented and back the choice of levying excise duties on them. However, 

221 Cnossen, Sijbren, Tobacco Taxation in the European Union (May 2006). CESifo Working Paper Series No. 
1718 
222 World Bank. 1999. Curbing the epidemic: governments and the economics of tobacco control. Tobacco 
control 8: 196-201. 
223 Ibid 
224 Cnossen, Sijbren, Tobacco Taxation in the European Union (May 2006). CESifo Working Paper Series No. 
1718 
225 WHO Europe. 2004. Taxation of tobacco products in the WHO European Region: practices and 
challenges. European Tobacco Control Policy Series 2. 
226 Eugene M. Lewit, Douglas Coate, The potential for using excise taxes to reduce smoking, Journal of 
Health Economics, Volume 1, Issue 2, August 1982, Pages 121-145 
227 Theodore E. Keeler, Teh-Wei Hu, Paul G. Barnett, Williard G. Manning, Taxation, regulation, and 
addiction: A demand function for cigarettes based on time-series evidence, Journal of Health Economics, 
Volume 12, Issue 1, April 1993, Pages 1-18 
228 World Bank. 1999. Curbing the epidemic: governments and the economics of tobacco control. Tobacco 
control 8: 196-201 
229 Eugene M. Lewit, Douglas Coate, The potential for using excise taxes to reduce smoking, Journal of 
Health Economics, Volume 1, Issue 2, August 1982, Pages 121-145 

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as  pointed  out in  previous  paragraphs,  the  paucity  of  empirical  studies  on  the  health 
effects  of  vaping  makes  the  case  for  imposing  excise  duties  on  e-cigarettes  rest  on 
weak  foundations  as  it  is  not  certain  yet  whether  externalities  exist.  Gruber  and 
Koszegi  (2002)230  in  the  context  of  an  economic  model  featuring  time  inconsistent 
agents claim that there is a role for a government intervention even in the absence of 
external costs in so far as smoking causes “internalities”, i.e. damages on the users of 
an addictive bad. Nevertheless, this is aspect is still unexplored. 

Another  prominent  problem  is  represented  by  the  fact  that  the  current  regulation 
(Council Directive 2011/64/EC) makes explicit reference to the presence of tobacco to 
quantify  the  amount  of  taxes  to  be  paid.  In  the  absence  of  specific  provisions,  e-
cigarettes  would  seem  to  fall  outside  the  scope  of  the  Directive  and  this  is  why 
Member States only charge the sales tax. The state of Minnesota found a way around 
this  problem  by  classifying  e-cigarettes  as  “other  tobacco  products”  and  imposing  a 
sales tax of 95% of the wholesale price that acts as an excise duty.231 

Health risks 
E-cigarettes are often regarded by users as a cheaper and safer smokeless alternative 
and/or  a  smoking  cessation  tool.  While  marketing  campaigns  by  manufacturers  and 
distributors  used  to  emphasize  these  two  aspects,  in  the  US  a  warning  by  the  FDA 
backed  by  a  ruling  of  the  US  Court  of  Appeals  put  an  end  to  this  practice.  In  the 
European  context,  the  situation  is  fragmented  as  different  Member  States  took 
different  stances  and  classified  this  product  in  different  manners.  As  the  work 
conducted  so  far  on  the  health  implications  of  vaping  is  judged  insufficient  and  not 
conclusive (Palazzolo 2013), further research on this is warned by virtually all authors. 
The  scarcity  of  results  affects  both  the  claims,  i.e.  e-cigarettes  as  a  safer  alternative 
and  e-cigarettes  as  a  cessation  tool.  Nevertheless,  it  is  worthwhile  to  investigate  the 
two aspects separately.  

Chemical  analyses  of  the  solutions  contained  in  the  cartridges  and  the  vapour 
generated  suggest  that  the  number  of  ingredients  is  relatively  small  if  compared  to 
traditional  tobacco  products  (Cahn  and  Siegel  2011).  Some  contaminants  which  are 
known  to  induce  or  promote  carcinogenesis  have  been  found  in  cartridges,  solutions 
and mist but only a minority of the studies report them to be at such levels as causing 
risk to human health. For instance, Burstyn (2013) summarizes the finding of different 
studies  and  concludes  that  “there  is  no  evidence  that  vaping  produces  inhalable 
exposures  to  contaminants  of  the  aerosol  that  would  warrant  health  concerns  by  the 
standards  that  are  used  to  ensure  safety  of  workplaces.”232  Moreover,  no  known 
toxicological synergies among compounds in the aerosol were found and the exposure 
of  bystanders  to  the  ingredients  and  the  contaminants  does  not  warrant  concerns. 
Similar conclusions are reached by Goniewicz et al (2013) who analyses four groups of 
chemical  compounds233  in  the  vapour  in  12  models  of  e-cigarettes.  234  Cartridges  are 
found not to contain (or to contain trace amounts of) toxic compounds, while vapor is 
reported  to  display  concentrations  9  to  450  times  lower  than  in  normal  cigarette 

230 Gruber, Jonathan, and Botond Koszegi. 2002. A Theory Of Government Regulation Of Addictive 
Bads:Optimal Tax Levels And Tax Incidence For Cigarette Excise Taxation. Journal of Public Economics, 
2004, v88(9-10,Aug), 
231 Washington Post, http://www.washingtonpost.com/blogs/govbeat/wp/2013/10/29/awaiting-fda-states-
pursue-their-own-e-cigarette-rules/ and USA Today 
http://www.usatoday.com/story/news/nation/2013/12/09/stateline-e-cigarette-revenue/3918913/  
232 Burstyn (2013), p.1. 
233 These are: Carbonyl compounds (e.g. formaldehyde, acetaldehyde, acrolein), volatile organic compounds 
(e.g.  benzene,  toluene,  aniline),  tobacco-specific  nitrosamines  (e.g.  benzo(a)pyrene,  benzo(a)anthracene) 
and metals (Cadmium, lead, mercury). 
234  Goniewicz  et  al,  Levels  of  selected  carcinogens  and  toxicants  in  vapour  from  electronic  cigarettes,  Tob 
Control 2013 

222 

 
 
 
 
 
 
 
 
                                           
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

smoke.  The  findings  are  claimed  to  be  consistent  with  the  idea  that  “substituting 
tobacco  cigarettes  with  e-cigarettes  may  substantially  reduce  exposure  to  selected 
tobacco-specific toxicants”.  

At  the  same  time,  other  studies  point  to  opposite  conclusions.  Schober  et  al  (2013) 
assessed  the  inner  and  outer  exposure  of  e-cigarettes  emissions  in  a  real-world 
setting, and found that substantial amounts of propylene glycol, glycerine and nicotine 
as  well  as  particulate  matter  and  fine  and  ultrafine  particles  (which  might  deposit  in 
the lungs) are present in  the gas-phase.  235 The concentration of putative carcinogenic 
Polycyclic  Aromatic  Hydrocarbon  (PAC)  and  aluminium  increased.  They  conclude  that 
e-cigarettes  are  not  emission-free  and  their  pollutants  could  be  of  health  concern  to 
for  users  and  second-hand  smokers.  It  has  been  noted  that  many  studies,  when 
analysing  the  limitations  of  their  experimental  designs,  point  to  a  possibly  different 
puffing  profile  of  e-cigarette  use  which,  if  not  properly  controlled  for,  could  bias  the 
estimates. However, no agreement exists at present of how the “puffing profile” looks 
like. On the contrary, it is said to vary from individual to individual (Palazzolo 2013). 

As pointed out in the introductory part, nicotine is an essential ingredient of e-liquids, 
made  exception  for  nicotine-free  solutions.  Nicotine  is  a  tobacco-derived  substance 
and a potent parasympathomimetic alkaloid. It acts on the central nervous system by 
stimulating the production of several neurotransmitters (e.g. dopamine) which in turn 
are responsible for the sense of relaxation and euphoria as well as for the addiction. In 
addition  to  creating  addiction,  it  has  been  reported  to  be  related  to  apoptosis, 
angiogenesis,  inflammation  and  cell  proliferation.  Moreover,  given  its  chemical 
properties,  this  compound  is  highly  absorbable  through  the  skin  and  the  mucous 
membranes and the contact with the liquid contained in a single cartridge is fatal for 
both adults and children. 

The incomplete risk profile of this product has led both parties (pro- and anti-industry) 
to invoke the precautionary principle (PP) as laid down in Article 191 TFEU. As pointed 
out by Bates et al (2003) in their discussion on the issue of smokeless tobacco, the PP 
“usually challenges those defending the status quo with uncertainties about the impact 
of change.”236 They conclude that instead of a ban,237 a regulation should be adopted to 
shape  the  market  and  ensure  that  the  products  placed  on  the  market  are  compliant 
with  the  objective  of  protecting  human  and  consumers’  health.  Similarly,  Flahault 
(2013) maintains that “the lack of full scientific certainty (on E-cigs) shall not be used 
as  a  reason  for  postponing  recommending  the  use  of  electronic  cigarettes  in  in 
addition  to  other  tobacco  control  measures  to  prevent  further  smoking  tobacco 
devastation.” 238  

As  far  as  the  debate  over  the  effectiveness  of  e-cigarettes  as  a  cessation  tool  is 
concerned,  empirical  works  are  split.  As  pointed  out  by  Erbach  (2013),  smoking 
cessation,  i.e.  abandoning  the  use  of  tobacco  products,  is  not  the  same  as  nicotine 
cessation,  i.e.  interrupting  the  absorption  of  the  substance.  A  major  limitation  of  the 
studies  concerned  with  the  effectiveness  of  e-cigarettes  vis-à-vis  other  NRT  products 
is  that  they  generally  report  only  the  smoking  cessation  rate.  Studies  in  this  strand 
include Bullen et al (2013), who conducted a randomized controlled trial with over 600 

235 Schober, Wolfgang, et al. 2013. Use of electronic cigarettes (e-cigarettes) impairs indoor air quality and 
increases FeNO levels of e-cigarette consumers. International Journal of Hygiene and Environmental Health 
236  Bates,  C  et  al.  2003.  European  Union  policy  on  smokeless  tobacco:  a  statement  in  favour  of  evidence 
based regulation for public health. Tobacco Control 12: 360-367, p.363. 
237 They explicitly refer to smokeless tobacoc products such as oral tobacco 
238  Flahault,  Antoine.  2013.  E-Cigarettes  a  disruptive  public  health  phenomenon:  Ethics,  risk  and  the 
precautionary  principle.  Presentation  at  the  conference  Science,  Regulation  and  Pblic  Health.  The  Royal 
Society, London, November 12th 2013.  

223 

 
 
 
 
 
 
 
 
 
                                           
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

smokers  willing  to  quit  and  concluded  that  e-cigarettes  are  “modestly  effective  at 
helping  smokers  to  quit,  with  similar  achievement  of  abstinence  as  with  nicotine 
patches, and few adverse events.”239 As reported in Palazzolo (2013), surveys suggest 
that  it  is  not  uncommon  for  users  to  switch  to  e-cigarettes  as  a  first  step  to  quit 
smoking. When compared to NRT products, e-cigarettes are reported to possess some 
advantages.  Firstly,  the  nicotine  delivery  profile  closely  matches  that  of  traditional 
cigarettes  thus  it  is  more  easily  accepted  as  substitute  by  smokers.  The  “hand-to-
mouth”  movement  and  the  “throat  hit”  perceived  by  the  user  mimic  the  effects  of  a 
tobacco  product  thus  they  help  fulfilling  both  biochemical  and  behavioural  aspects  of 
smoking. Secondly, the amount of nicotine reaching the blood stream has been shown 
to be less than a comparable tobacco product (Palazzolo 2013). Thirdly, an experiment 
reported  by  the  same  author  concluded  that  the  pharmacokinetic  profile  of  an  e-
cigarette  is  very  similar  to  that  of  a  FDA-approved  nicotine  inhaler  but  participants 
found  that  the  former  was  more  pleasant  to  smoke  and  entailed less irritation  to  the 
mouth and throat. An additional aspect, highlighted by Barbeau et al (2013) relates to 
the social benefits of feeling part of a community with a strong identity, a feature that 
is not present in NRTs. 

When  it  comes  to  the  effectiveness  of  e-cigarettes  in  stopping  nicotine  dependence, 
Palazzolo (2013) judges it to be insufficient to draw any conclusion. Chapman (2013) 
reports that, while harm reduction and smoking cessation are  often claimed by users 
as  the  reasons  for  switching  to  e-cigarettes,  the  difference  in  the  quit  rates  among 
users  and  non-users  is  not  statistically  significant.  Some  physicians  fear  that  e-
cigarettes  simply  act  as  an  alternative  delivery  mechanism  for  nicotine  while  not 
eradicating  the  problem  of  its  consumption  which  has  been  proven  to  contribute  to 
endothelial  dysfunctions,  thrombogenesis  and  systemic  inflammations  (Palazzolo 
2013).  At  the  same  time,  users  of  e-cigarettes  were  reported  to  decrease  their 
consumption  of  cigarettes  and  the  side  effects  to  be  less  annoying  than  with  other 
FDA-approved NRTs (Palazzolo 2013). Bates et al (2003) warn that “the aspiration to 
tackle  both  the  addiction  and  the  physical  harm  by  complete  tobacco  cessation  may 
work for a subset of users […] or it may end it tackling neither.”240  

A  related  issue,  often  pointed  out  in  the  literature  is  represented  by  the  so  called 
“gateway  effect”.  As  explained  by  Bates  et  al  (2003),  smokeless  alternatives  may 
serve as a  “lead-in to smoking for people who  would not otherwise  smoke.”  It is still 
open  to  debate  whether  this  phenomenon  (and  in  what  direction)  applies  to  e-
cigarettes. Currently there is little or no evidence for this claim, however to the extent 
that  e-cigarettes  are  ineffective  in  curbing  nicotine  addiction  their  wide  availability 
may result in a rise in the number of nicotine addicts worldwide (Palazzolo 2013). The 
same  concern  is  expressed  by  the  FDA  which  fears  that  e-cigarettes  could  be 
particularly  appealing  to  young  consumers  thanks  to  their  design,  the  availability  of 
different flavours, their price and may thus lead to smoking conventional cigarettes. In 
a  study  conducted  by  Goniewicz  and  Zielinska-Danch  (2012),  a  survey  among  high-
school and university students in Poland indicates that between 20% and 25% of the 
students  ever  tried  e-cigarettes,  and  only  a  minority  (3.2%)  is  represented  by  non-
smokers.  241  Comparable  studies  reported  in  Palazzolo  (2013),  indicate  that  there  is 
increase awareness about e-cigarettes,  especially in young cohorts, however it is not 
clear if and to what extent awareness is linked to usage. 

Product quality and safety 

239 Bullen, Christopher et al. 2013. Electronic cigarettes for smoking cessation: a randomised controlled trial. 
The Lancet, Volume 382, Issue 9905, Pages 1629 - 1637 
240 Bates et al (2003), p.361 
241 Goniewicz, Maciej Lukasz and Wioleta Zielinska-Danch. 2012. Electronic Cigarette Use Among Teenagers 
and Young Adults in Poland. Pediatrics; originally published online September 17, 2012 

224 

 
 
 
 
 
 
 
 
                                           
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

The literature review allowed for singling out some aspects related to the quality and 
safety of the products. It should be noted that at present there exist no international 
standards regulating the production of e-cigarettes, cartridges and refill liquids. 

A prominent issue often pointed out by the literature is the reliability and accurateness 
of  labelling  in  reporting  the  type  and  the  quantity  of  substances  contained  in  the 
liquids. Trehy et al (2013) and Schober et al (2013) conclude their analyses by stating 
that  wrong  information  is  reported  in  several  cases.242  Traces  of  nicotine  were  also 
found  in  purported  nicotine-free  brands.  Opposite  conclusions  are  reached  in  Etter  et 
al  (2013)  where  20  models  of  refill  liquids  of  10  popular  brands  are  analysed.  The 
same  study  found  the  quality  of  the  products  to  be  “surprisingly  good.”243  Impurities 
were  detected  in  several  brands  above  the  levels  for  nicotine  products  (according  to 
the  European  Pharmacopoeia  standards),  but  below  the  levels  where  they  would  be 
harmful.  There  are  several  reasons  explaining  the  presence  of  impurities  including 
unstable  formulations,  adding  of  flavourings,  undesirable  interaction  with  the 
packaging material, incorrect handling and/or storing.  

A  second  potential  threat  to  consumers’  safety  is  represented  by  the  high 
concentration  of  nicotine  in  the  liquids.  The  studies  consulted  (Schober  et  al  2013; 
Etter  et  al  2013)  unanimously  point  to  the  risks  linked  with  an  incorrect  handling  of 
the  liquid.  Indeed,  given  that  nicotine  is  quickly  absorbed  through  the  skin  and 
mucous  membranes  and  given  that  a  vial  of  liquid  can  contain  up  to  720  mg  of 
nicotine, accidental contact and/or swallowing by both adults and children is fatal. This 
calls for standards to be imposed on packaging to make them child-safe. 

242 Trehy, Michael L., et al, 2011, Analysis of electronic cigarette cartridges, refill solutions, and smoke for 
nicotine  and  nicotine  related  impurities,  Journal  of  Liquid  Chromatography  and  Related  Technologies,  34: 
1442:1458 
243 Etter et al (2013), p.1678 

225 

 
 
 
 
 
 
 
 
                                           
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Appendix 7 – Analysis of products whose classification 
requires subjective interpretation of the law 

Table 32  Analysis of products whose classification requires subjective interpretation of the law 

Name and description 

Nature of the dispute 

Partner cigarillos  

A Philip Morris 
International-product, 
wrapped by a thin 
tobacco leaf. 

BREAK cigarillos  

A cigarillo which has a 
further layer of paper 
that covers the outer 
wrapper of natural 
tobacco. 

At the apparent level of the dispute lay the different 
interpretations of the definitions of cigarillos in 
customs and tariff legislation on the one side and 
excise duty legislation on the other side. 

More specifically, application of the objective criteria 
of "outer wrapper of natural tobacco" in (Art. 
4(1)(a)) of the Directive 2011/64/EC) played a 
central part in the dispute as well.  

According to Art.4(1)(a), cigars/cigarillos are rolls of 
tobacco with an “outer wrapper of natural tobacco.”  

According to the new explanatory notes for CN code 
2402 10 00 cigars and cigarillos “rolls of tobacco 
with an outer wrapper of natural tobacco covering 
the product in full including, where appropriate, the 
filter” 

As a result, for custom purposes, a product with an 
outer wrapper of tobacco not covering the filter 
would have to be classified in a different category 
(e.g. 2402 20). The customs classification would, on 
the other hand, not legally bind the classification for 
excise purposes. 

At the core of the dispute, however, lays the 
understanding of Art 4(1) “given normal consumer 
expectations, are exclusively intended to be smoked 
as it is” – and whether this article can be 
interpreted as referring to the consumption of the 
product “as a cigar” or without any further 
“handling”. 

The essence of this dispute is similar to that 
described above, at apparent level it results from 
the differentiated definitions between the new 
explanatory notes of CN code 2402 10 00 and Art. 4 
of the Directive. 

This product fulfils the specific provision of the 
Directive, but they do not fulfil the corresponding 
provisions of the explanatory notes to the combined 
nomenclature, as was the case with the Partner 
Cigarillos. 

The authorities are also concerned about the fact 
that, given the characteristics of the product, it is 
expected to be smoked as a cigarette, and as such, 

226 

Outcome and 
treatment 

This product has been 
disputed in several 
Member States, 
including the NL, DE, LT 
and PT, LV 

Cigarillos Partner that 
were released for 
consumption in Latvia: 
125 526 thousand pieces 
(2010) and 116 375 
thousand pieces (2011). 

Cigarettes (in 
thousand): 
approximately 2,294,348 
(2009) 

1,770,518 (2010) 

(22.83% change) 

Cigars and cigarillos:       
approximately 6088 
(2009) 

133,275 (2010) 

EL: At the moment of 
data collection the 
product was being 
marketed in Greece as a 
cigarillo, a classification 
that is being contested 
by the authorities. 

A Binding Tariff 
information (BTI) had 
been requested and the 
results were not 
available at the time of 
data collection. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
                                     
                                                           
                                      
 
 
 
 
 
 
 
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

Name and description 

Nature of the dispute 

L&M cigarillos 

A filter cigarillo with an 
outer wrapper of  
tobacco leaf not covering 
the filter 

it should be treated as equivalent product. 

With the outer wrapper of natural tobacco the L&M 
cigarillo fulfils the specific provision of the Directive 
from an objective point of view.  

However, the outer wrapper of the L&M cigarillos 
does not cover the filter, which according to the 
explanatory notes of CN code 2402 10 00 would 
have to be classified as a cigarette. 

Similarly to the BREAK cigarillos, the authorities also 
consider that the fact that this product is smoked as 
a cigarette should be reflected in its tax treatment. 

West cigarillos 

A filter cigarillo with an 
outer wrapper of  
tobacco leaf not covering 
the filter 

Gullivers 

A cigar-like stick filled 
with fine-cut-tobacco 
and wrapped in a roll of 
tobacco. 

Each stick contains 
enough tobacco to make 
approximately 12 
cigarettes. 

Similar to the products described above, this 
product is a roll of tobacco with an outer wrapper of 
tobacco 

The nature of the dispute centred around the excise 
treatment of this tobacco product in light of its 
characteristics similar to those of a cigarette and 
the claim of the operator that it should be treated 
as a cigar 

This dispute centred on the fact that the authorities 
considered this product not to be a cigar, but just a 
means of selling RYO tobacco and avoiding to pay 
the appropriate excise duty. 

From a legal point of view, the provisions of Art 4 
(1), and in particular the meaning of “given their 
properties and normal consumer expectations are 
exclusively intended to be smoked as they are” 

The opinion of the authorities is that this product 
cannot be smoked “as is” as it fails to light and 
disintegrates during smoking. 

It is the opinion of the authorities that the product 
is in fact bulk tobacco packs to be used for RYO 
cigarettes.244  

RYO filling stations 

The RYO filling stations have been developed as an 
alternative to slow, low volume home RYO 
machines. 

The speed of the new RYO filling stations is 8 

244 http://cigarcyclopedia.com/news-views/cigar-news?start=884 

227 

Outcome and 
treatment 

EL: As a result of the 
dispute, the economic 
operator redesigned the 
product, which now 
includes a wrapper of 
tobacco on the filter. 

BTI was requested which 
concluded that this 
product should be 
classified as a cigarillo 

The product is also 
marketed in DE, but 
under a different brand 
name, it is also treated 
as a cigarillo there as a 
result of a BTI 

EL: Based on a BTI 
request it was concluded 
that this product was 
classified as a cigarillo. 

The issue described 
concerns LV, however 
additional research has 
shown that this product 
is also present in CZ, PL 
and SK 

In LV, the problem is still 
not resolved due to the 
fact it is centred around 
a subjective criteria 
which, according to the 
authorities, is difficult to 
prove in court 

FI: Finish authorities 
ruled that this is 
considered as 
commercial 
manufacturing of 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                           
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

Name and description 

Nature of the dispute 

minutes per 200 cigarettes245 

The issue reported with the RYO filling stations is 
that these machines are located in small tobacco 
shops, where consumers can buy fine cut tobacco, 
cigarette papers and filters and then use the 
machine to make cigarettes.   

Melasa Herbal Hukka 

Herbal molasses for 
hookah, without tobacco 
and nicotine. Produced 
by SOEX India Pvt Ltd 

The nature of this dispute centres around the excise 
treatment of “water pipe tobacco” not containing 
tobacco,  

Legally speaking it regards the interpretation of Art. 
5 (1) (a) read in conjunction with Art. 2 (2) 

A sample was analysed by gas chromatography with 
NP detector method and results showed the pattern 
of nicotine traces (less than 10 ppm) where the 
content of tobacco and tar regarding the 
consistency of the sample could not be determined. 

Dried tobacco leaves and 
Grossly cut tobacco 
leaves 

The issue of bags of raw tobacco leaves) concerns 
the interpretation of Art. 5 (1) (a), and in particular 
the wording "can be smoked" and "without further 
industrial processing". 

It Italy, the product, was being advertised as a 
home fragrance, although it was clear that the 
product could be smoked by the user with little 
processing (cutting up the leaves). 

Similarly in nature, the issue of grossly cut tobacco 
leaves was raised by an economic operator wishing 
to launch the product on the market. They 
voluntarily requested the IT administration for an 
opinion regarding the tax treatment of the product.  

In addition, other cases involving raw or partially 

245 http://ryofillingstation.com/about.php 

228 

Outcome and 
treatment 

cigarettes and therefore 
excise duty on cigarettes 
must be paid. 

The process is still 
ongoing; an audit 
control on the company 
will establish the 
quantities sold and 
impose excise duty. 

HR:  

The result of the BTI 
concluded that Melasa 
Herbal Hukka should be 
classified and taxed as 
other smoking tobacco 

In HR, during 2012, 29 
kg of molasses were 
released for 
consumption, while in 
2013; 94 kg were 
released for 
consumption. 

Concrete cases 
presented regard  Italy 
and Poland, however, 
similar cases have been 
reported in other 
countries, including EL, 
HU, CZ, etc. 

Outcomes:  

In Italy, the tax 
administration 
acknowledged the lack 
of a specific definition of 
raw tobacco, but decided 
that the products should 
be subject to excise duty 
under the category of 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                           
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

Name and description 

Nature of the dispute 

processed tobacco have taken place, with economic 
operators claiming that the products should be 
marketed freely, while administrations claiming that 
the product could be smoked and required only 
marginal handling by consumers for this purpose, a 
particularly interesting case is the one of Poland: 

In Poland, in the aftermath of the deregulation 
regarding the circulation of raw tobacco taking place 
in 2010 (Council Regulation 73/2009) and before 
introducing the legislative on the taxation of raw 
tobacco [PTES: on January, 1st 2013] tax 
authorities received a lot of calls from economic 
operators for giving out administrative 
interpretations to confirm that raw tobacco leaves 
independent of their degree of processing, e.g. 
“dried tobacco leaves without stalks” are not 
considered as tobacco that can be smoked. 

According to the operators’ view, such tobacco 
leaves cannot be smoked without further industrial 
processing. 

Another issue of concern regarding Art. 5 (1) (a), 
and in particular the wording "can be smoked" was 
reported. 

As the excise treatment of tobacco refuse (CN 2401 
30 00 or CN 2403 10 10) depends on whether it is 
“put up for retail sale”, there would be legal 
uncertainty with respect to the treatment of tobacco 
refuse sold in bulk, but otherwise capable of being 
smoked as it is. 

Tobacco refuse  

CN 2401 30 00 or CN 
2403 10 10  

Outcome and 
treatment 

"other smoking tobacco" 
following the 
interpretation of Art.5 in 
Council Directive 
2011/64/EU. 

In Poland, as a result of 
the extent of the 
problem a complete 
overhaul of the 
treatment of raw 
tobacco was undertaken 
in order to introduce 
controls on the growing 
and processing of raw 
tobacco, in addition, the 
polish authorities 
consider dried tobacco 
leaves as other smoking 
tobacco, in the meaning 
of Art 5, as they are 
capable of being 
smoked. 

EL: Tax exemption of 
tobacco refuse is 
granted only when it is 
denaturised 

PL, RO and CZ 
expressed concern about 
this issue, warning that 
there are uncertain on 
how they would treat 
this product if faced with 
a concrete situation  

Reconstituted tobacco 

CN 2403 91 00 

The dispute in Romania centred on the excise 
treatment of reconstituted tobacco (and whether it 
should fall under “other smoking tobacco” or not).  

RO – considers the 
product as an excisable 
tobacco product 

The product was not put up for retail sale, but it’s 
treatment had an impact on the monitoring 
function, as any movement would have had to be 
done under the EMCS. 

Tobacco extracts and 
essences 

CN 2403 99 90 

These aromatic products were marketed as air 
refreshers, but actually the ingredients of these 
aromatic products are used for water-pipes. 
Moreover, some of those aromatic products contain 
tobacco and therefore, practically, are not suitable 
for refreshing air, while at the same time some of 
those products do not contain tobacco and hence 
can be used for water-pipes as well as for refreshing 
air. 

PL: outcome: considered 
as smoking tobacco if 
containing tobacco. 
However, if not 
containing tobacco, 
unclear how to treat it. 

Tobacco rolling paper 

On the subject, two aspects are to be taken into 

DK 

229 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

Outcome and 
treatment 

Outcome: Ruling 
concluded that it should 
be treated as smoking 
tobacco 

HU 

Outcome: (not specified) 

Name and description 

Nature of the dispute 

Consisting of a mix of 
paper and tobacco 

account:  

The first regards the effect on the monitoring and 
control function, which could be affected if this 
product, (a tobacco raw material) would not be 
subject to monitoring and control as a result of it’s 
non-inclusion as an excisable tobacco product. 

The second aspect relates to the methods of 
ensuring the application of (Art. 4 (1) (b) , “Outer 
Wrapper of the normal colour of a cigar, of 
reconstituted tobacco” and specifically the methods 
of verifying if the wrapper is indeed composed of 
reconstituted tobacco 

According to Forensic Institute of NTCA (Hungary) 
the analytical control of the outer wrapper from 
reconstituted tobacco is difficult. The identification 
of nicotine in the wrapper is not enough to 
demonstrate whether it is totally produced from 
reconstituted tobacco. 

230 

 
 
 
 
 
 
 
 
 
 
 
 
 
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

Appendix 8 – Overview of national definitions and treatment 
of raw tobacco 

Table 33 Overview of national definitions and treatment of raw tobacco 

Country 

Definition for fiscal 
purposes 

Treatment of raw tobacco 

Austria 

Belgium 

Raw tobacco not specifically 
defined 

Not excisable and not subject to any authorisation or 
licensing requirements. 

Raw tobacco not specifically 
defined 

Producers of raw tobacco exist and are subject to an 
authorization.  

Production and destination of leaves must be declared. 

Czech  
Republic 

Raw tobacco not specifically 
defined 

Raw tobacco is not subject to any licensing or 
authorisation. 

However, this issue is under discussion due to recent 
increase of illicit trade in raw tobacco.    

Denmark 

Raw tobacco not specifically 
defined 

Only operators authorised for manufacturing of tobacco 
products are entitled to acquire and trade with raw tobacco. 
Raw tobacco may only be sold to such companies. 

France 

Data not available 

Not answer to survey. 

Estonia 

Raw tobacco not specifically 
defined 

Not excisable and not subject to any authorisation or 
licensing requirements.  

No data collected on the movement of raw tobacco. 

Finland 

“Non-manufactured products 
falling under CN 
classification 2401”  

Excise duty must be paid within 10 days after importation 
unless the importer is an authorised warehouse keeper or 
registered consignee.  

Germany 

Raw tobacco not specifically 
defined 

Trading raw tobacco is not subject to authorization, 
limitations or monitoring measures. 

Lithuania 

Latvia 

“Nicotiana (Nicotiana 
tabacum, Nicotiana rustics 
and other species) of the 
Solanaceae family, whether 
genetically modified or not, 
as well as the leaves and 
other parts of the tobacco 
plant” 

“The tobacco in the form of 
whole plants or leaves in 
natural state or in the state 
of dried or fermented 
leaves, whole or with a cut-
out vain, cut or uncut, 
broken or cut (including the 
pieces cut in a particular 
way but unfit for smoking)” 

Tobacco growing is subject to licensing, however, in 
practice, not a single licence has been issued for tobacco 
growing. 

No licencing or other kind of authorisation regarding the 
raw material for manufacturing the tobacco goods is 
applied in Latvia. 

Poland 

“tobacco, irrespective of its 
grade of humidity, which is 
not joint with the living plant 

, Operators involved in trading in raw tobacco are subject 
to authorisation. 

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Country 

Definition for fiscal 
purposes 

Treatment of raw tobacco 

and is not classified as a 
manufactured tobacco 
product” 

Portugal 

“garden / green leaf/dried 
leaf sold directly to the 
public". 

Excise duty is charged on the acquisition or possession of 
raw tobacco by operators other than “operators running a 
tax warehouse”, “tobacco sale intermediaries” or tobacco 
growers (farmers) cultivating raw tobacco if the appropriate 
amount of excise duty was not paid by these and if it is not 
possible to identify the economic operator that had sold the 
raw tobacco.   

For the purpose of being able to exercise monitoring 
activities on the circulation of raw tobacco being subject to 
excise duty, Polish rules/legislation foresee(s) the 
obligation of marking such products with tax stamps as well 
as wrapping it in closed boxes. 

Raw tobacco became an excisable good in January 2014.  

Romania 

“the product resulting from 
initial transformations of the 
tobacco leaf taking place in 
authorised units to carry out 
this first transformation” 

Economic operators who wish to sell raw tobacco or 
partially processed tobacco originating from any import 
operations, intra-community acquisitions or from own 
production may only do so on the basis of an authorisation 
handed by competent authority 

Raw tobacco or partially processed tobacco can only be sold 
to authorised warehouse keepers, directly to the premises 
of the fiscal warehouse 

Any movement of raw tobacco on the territory of Romania 
must be done under cover of a commercial document 
containing the name and number of the authorised 
operator 

When the following are not observed, the concerning 
person is liable to pay excise duty corresponding to the 
excise duty for other smoking tobacco (81 EUR/kg) 

Sweden 

Spain 

Raw tobacco not specifically 
defined 

Raw tobacco is in free circulation and not subject to 
licensing or authorisation 

Raw tobacco not specifically 
defined; 

The cultivation of tobacco is controlled by the Ministry of 
Agriculture, for the purposes of fulfilling the obligations of 
the agricultural sector 

Slovenia 

Raw tobacco not specifically 
defined 

Raw tobacco is in free circulation and not subject to 
licensing or authorisation 

No information is collected regarding its movements 

232 

 
 
 
 
 
 
 
 
 
 
 
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Country 

Definition for fiscal 
purposes 

Treatment of raw tobacco 

Slovakia 

“Naturally or artificially  
dried or fermented tobacco 
leave from plant Nicotiana 
tabacum and its parts”  

Person who wants to trade (growing, drying, fermenting, 
receiving, storing and dispatching) must register at custom 
office.  

“The rest of tobacco leaves 
originated from its 
processing and manipulation 
or by the tobacco products 
production”,  

“Homogenised or 
reconstructed tobacco (not 
excisable) made of finely cut 
tobacco, processed tobacco 
refuse and tobacco dust” 

“Tobacco refuse or tobacco 
foil if it is not a tobacco 
product.” 

“the leaves of a cultivated 
plant species Nicotiana 
tabacum L. in all forms and 
at all levels of cultivating, 
processing and packaging 
not intended for final 
consumption” 

Croatia 

The holder of the tobacco raw material trading 
authorisation is required to keep records of tobacco raw 
material  

It is required, not later than two working days prior to any 
receipt of such tobacco raw material in the tax territory 
from another Member State, dispatch to another Member 
State, import from third countries or export to third 
countries, to notify the customs office 

Growers are subject to registration may only sell to 
processors of raw tobacco or authorised warehouse 
keepers. 

“Processors of raw tobacco” must be registered in the 
Register of Tobacco Processors with the Ministry of 
Agriculture 

The tobacco which has been cut or otherwise chopped, 
bended or pressed into blocks and suitable for smoking 
without further industrial processing (Article 5 paragraph 
1a of Directive 2011/64/EU) is found with the legal or 
physical person that does not have the status of a tobacco 
manufacturer within the meaning of the Tobacco Act shall 
be subject to excise duty as smoking tobacco and a 
misdemeanour proceeding shall be initiated 

Netherlands 

“Raw tobacco is every type 
of tobacco which cannot be 
considered as an excisable 
tobacco product as defined 
in the law” 

Raw tobacco is subject to licensing. 

The transport of raw tobacco needs to be accompanied by a 
document that provides information about the origin.  

These requirements are also applicable for tobacco which is 
partly prepared for consumption (non-excisable good). 

233 

 
 
 
 
 
 
 
  
 
 
 
 
 
 
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

Country 

Definition for fiscal 
purposes 

Treatment of raw tobacco 

United 
Kingdom 

Raw tobacco is defined “by 
exclusion” as a tobacco 
product that does not fall 
within the scope of any of 
the other categories 

Luxembourg 

Raw tobacco not specifically 
defined 

Raw tobacco is not excisable and it is not systematically 
controlled for at the moment. However, the UK authorities 
have commissioned a study to pin down the size of the 
problem of raw tobacco and find ways to tackle it. 

Raw tobacco is in free circulation and not subject to 
licensing or authorisation, however, Raw tobacco is only 
imported by one company producing manufactured tobacco 
which is registered as a warehouse-keeper for this 
manufacturing purpose 

Bulgaria 

Data not available 

Has not responded the questionnaire 

Greece 

Reference in national law 
made to CN code 2401 and 
respective explanatory notes 

In Greece, tobacco growers are not bound to receive 
authorization prior to commencing operations, however 
they required by law to declare production to the ministry 
of agriculture. 

In addition to that obligations Growers have to conclude 
contracts with first processors of raw tobacco 

First processors of raw tobacco  have to be registered 
in the unified register for traders of agricultural products, 
supplies and inputs, The register is an electronic database; 
currently, the ministry of agriculture is elaborating new 
rules on the conditions and procedures necessary for this 
register. 

Malta 

Cyprus 

Raw tobacco not specifically 
defined 

It is not an excisable good and hence it is not subject to 
excise licensing or authorisation 

“tobacco in any form 
including stalks and tobacco 
waste not falling under the 
definition of manufactured 
tobacco” 

Raw tobacco is not subject to excise duty,  

Imported raw tobacco must be placed in an authorised 
customs warehouse or a tax warehouse upon importation.  

For the time being, raw tobacco is not cultivated in Cyprus, 
however, the legislation provides that any tobacco growers 
must be licensed and that only licensed “native tobacco 
warehouses” may purchase raw tobacco manufactured in 
Cyprus.  

Italy 

Raw tobacco not specifically 
defined 

In IT raw tobacco is a free circulation product, thus it is not 
subject to excise duties nor its production and/or 
movement subject to any control or licensing. 

Hungary 

'Cured tobacco' shall mean 
raw tobacco as removed 
from the stem, and 
unmanufactured tobacco or 
tobacco refuse of heading 
2401; 

Those who import, export, store, sell, possess 'cured and 
fermented tobacco' shall be registered at the customs 
authorities. 

Tobacco importers and suppliers shall keep accurate trade 

234 

 
 
 
 
 
 
 
 
 
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

Country 

Definition for fiscal 
purposes 

Treatment of raw tobacco 

'Fermented tobacco' shall 
mean tobacco processed to 
induce changes to make it 
suitable for consumption 

records, and shall notify all tobacco shipments to the 
customs authority broken down per consignments, at the 
latest by the time of the commencement of the given 
import and trade transaction 

Fulfilment of registration, monitoring and oversight, and 
the related administrative proceedings are treated as excise 
matters 

Ireland 

“Anything that falls to be 
classified as such under the 
combined nomenclature of 
the European 
Communities”246  

“Where any unmanufactured tobacco is found in the State 
and where that unmanufactured tobacco is not shown to 
the satisfaction of the Commissioners to be kept, or to be 
in the course of delivery— 

(i) under a customs procedure within the meaning of 
Council Regulation (EEC) No. 2913/92 of 12 October 1992 , 

(ii) for use as raw material for the production of tobacco 
products in a tax warehouse, 

(iii) for use as raw material for the production of any 
product or thing other than a tobacco product, or 

(iv) for any other use that is not contrary to this section, 

then it shall be presumed until the contrary is proved that 
the unmanufactured tobacco is prohibited goods”. 247  

246 As defined in section 71 of the Finance Act 2005, amended by section 56 of the Finance Act 2013 
247 Finance Act 2013 (Section 56). 

235 

 
 
 
 
 
 
 
 
 
 
                                           
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

Appendix 9 – Bibliography 

Legislation 

Commission Regulation (EEC) No 3311/86 of 29 October 1986 on the tariff 
classification of goods falling within subheading 24.02 E of the Common Customs 
Tariff, published in the Official Journal on 31. October 1986 

Commission Regulation (EEC) No 3649/92 of 17 December 1992 on a simplified 
accompanying document for the intra-Community movement of products subject to 
excise duty which have been released for consumption in the Member State of 
dispatch, published in the Official Journal on 18 December 1992 

Council Directive 72/464/EEC of 19 December 1972 on taxes other than turnover 
taxes which affect the consumption of manufactured tobacco, published in the Official 
Journal on 31. December 1972 

Council Directive 92/12/EEC of 25 February 1992 on the general arrangements for 
products subject to excise duty and on the holding, movement and monitoring of such 
products, published in the Official Journal on 23. March 1992 

Council Directive 92/79/EEC of 19 October 1992 on the approximation of taxes on 
cigarettes, published in the Official Journal on 31. October 1992 

Council Directive 92/80/EEC of 19 October 1992 on the approximation of taxes on 
manufactured tobacco other than cigarettes, published in the Official Journal on 31. 
October 1992 

Council Directive 95/59/EC of 27 November 1995 on taxes other than turnover taxes 
which affect the consumption of manufactured tobacco, published in the Official 
Journal on 6. December 1995 

Council Directive 2001/37/EC of the European Parliament and of the Council on the 
approximation of the laws, regulations and administrative provisions of the Member 
States concerning the manufacture, presentation and sale of tobacco products, 
published in the Official Journal on 18 July 2001 

Council Directive 2001/95/EC of the European Parliament and of the Council of 3 
December 2001 on general product safety, published in the Official Journal on 15. 
January 2002 

Council Directive 2002/10/EC of 12 February 2002 amending Directives 92/79/EEC, 
92/80/EEC and 95/59/EC as regards the structure and rates of excise duty applied on 
manufactured tobacco, published in the Official Journal on 16. February 2002 

Council Directive 2003/117/EC of 5 December 2003 amending Directives 92/79/EEC 
and 92/80/EEC, in order to authorise the French Republic to prolong the application of 
lower rates of excise duty to tobacco products released for consumption in Corsica 
Directive 2010/12/EC, published in the Official Journal on 20. December 2003 

236 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

Council Directive 2008/118/EC of 16 December 2008 concerning the general 
arrangements for excise duty and repealing Directive 92/12/EEC, published in the 
Official Journal on 14. January 2009 

Council Directive 2011/64/EU of 21 June 2011 on the structure and rates of excise 
duty applied to manufactured tobacco (codification), published in the Official Journal 
on 5. July 2011 

Rules of procedure for the Customs Code Committee established by Articles 247a and 
248a of the Community Customs Code 

Italy, Legislative Decree of 28. June 2013, no. 76 - Primi interventi urgenti per la 
promozione dell'occupazione, in particolare giovanile, della coesione sociale, nonché in 
materia di Imposta sul valore aggiunto (IVA) e altre misure finanziarie urgenti 
(13G00123) 

Second Council Directive 79/32/EEC of 18 December 1978 on taxes other than 
turnover taxes which affect the consumption of manufactured tobacco, published in 
the Official Journal on 16 January 1979 

Treaty on the functioning of the European Union, published in the Official Journal on 
30. March 2010 

UK, Finance Act, 2005 

UK, Finance Act, 2013 

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Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

European Commission, DG Internal Markets and Services, 2011, Intra-Community 
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Etter J-F, Zäther E and Svensson S, 2013, Analysis of refill liquids for electronic 
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239 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Study on the measuring and reducing of administrative cost in imposing excise duties on tobacco products 

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240 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Forbes, 2013, E-Cigarettes are smoking hot – Four ways to invest in them, published 
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241 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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