REPORT FROM THE COMMISSION TO THE COUNCIL on Directive 2011/64/EU on the structure and rates of excise duty applied to manufactured tobacco
Date: 2018-01-12
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: EU Member State, excise duty, illicit trade, single market, tax harmonisation, tobacco, tobacco industry

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 12.1.2018  COM(2018) 17 final  REPORT FROM THE COMMISSION TO THE COUNCIL on Directive 2011/64/EU on the structure and rates of excise duty applied to manufactured tobacco  
 
 
Contents 

1) 

Introduction ................................................................................................................................. 2 

2)  Background ................................................................................................................................. 2 

3) 

Issues and findings ...................................................................................................................... 2 

a)  Harmonisation of the tax treatment of novel products such as electronic cigarettes at EU level 3 

b) 

Illicit trade in raw tobacco ........................................................................................................... 4 

c)  Tax-induced substitution of cigarettes by low-price cigarillos ................................................... 5 

d)  Tax-induced substitution of cigarettes by fine-cut tobacco ......................................................... 5 

e) 

Illicit trade in water-pipe tobacco ................................................................................................ 6 

f)  Minimum Excise Duty on cigarettes ........................................................................................... 6 

4)  Conclusion and way forward ....................................................................................................... 6 

1 

 
 
 
 
 
 
 
 
 
1)  Introduction 

On  8  March  2016,  the  Council  (ECOFIN)  requested  the  European  Commission  to  undertake  the 
necessary  studies  to  submit  a  legislative  proposal  for  revision  of  Directive  2011/64/EU  of  21  July 
2011 on the structure and rates of excise duty applied to manufactured tobacco.1, 2 In the event that the 
Commission decided not to submit a proposal, the Council requested to be informed of the reasons for 
this decision. This report presents the results and conclusions of an external study on this subject and 
sets  out  the  reasons  why  the  Commission  has  decided  to  not  submit  a  proposal  for  revision  of 
Directive 2011/64/EU at this moment in time.3  

2)  Background 

Directive 2011/64/EU sets out harmonised rules at EU level on the structure and rates of excise duty 
applied to manufactured tobacco. In particular, it defines and classifies various manufactured tobacco 
products covered by the Directive according to their characteristics. The structure of the excise duties 
for the different types of products is also established in this Directive. The Directive was identified for 
evaluation  under  the  Commission's  Regulatory  Fitness  and  Performance  Programme  (REFIT).4  An 
external evaluation of this Directive was finalized in 2014 and was followed by a Commission Report 
presenting  the  results  and  conclusions  of  the  evaluation  in  2015.5  This  report  was  discussed  by 
Member  States  in  the  Council  (ECOFIN)  and  a  set  of  conclusions  on  future  action  in  this  area  was 
adopted  on  8  March  2016.  In  order  to  comply  with  the  request  of  the  Council  contained  in  these 
conclusions,  the  Commission  started  the  preparation  of  an  impact  assessment  and  contracted  an 
external consultant to carry out a study for this purpose. The object of the study was to contribute to 
the  impact  assessment  for  a  possible  revision  of  Directive  2011/64/EU.  The  issues  analysed  were 
among those identified in the evaluation carried out in 2014.  

3)  Issues and findings  

1 Council conclusions on the structure and rates of excise duty applied to manufactured tobacco, 8 March 2016 
http://www.consilium.europa.eu/en/press/press-releases/2016/03/08-ecofin-conclusions-structure-rates-
manufactured-tobacco/ 
2 Council Directive 2011/64/EU of 21 June 2011 on the structure and rates of excise duty applied to 
manufactured tobacco   
3 The external study is published on the website of the Directorate-General for Taxation and Customs Union: 
https://ec.europa.eu/taxation_customs/publications/studies-made-commission_en.  
4 REFIT is a programme to review the entire stock of EU legislation – to identify burdens, inconsistencies, gaps 
or ineffective measures and to make the necessary proposals to follow up on the findings of the review. 
5 TAXUD/2012/DE/341, Specific contract No4 under FWC TAXUD/2012/CC116, ''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'' 
COM(2015) 621 final ''REPORT FROM THE COMMISSION TO THE COUNCIL on the REFIT evaluation of 
Directive 2011/64/EU and on the structure and rates of excise duty applied to manufactured tobacco'' 

2 

 
 
 
 
 
 
 
                                                            
The external study on the possible revision of Directive 2011/64/EU focussed on six areas. The main 
issues analysed and the findings of the external study are summarized below. 

a)  Harmonisation  of  the  tax  treatment  of  novel  products  such  as  electronic 

cigarettes at EU level  

E-cigarettes 
E-cigarettes are currently not covered by the tobacco excise duty directive. Member States may apply a 
national tax to e-cigarettes as they find fit under their own rules. At present nine Member States tax e-
cigarettes  under  national  rules  and  a  few  more  are  reported  to  be  considering  it.6  These  different  tax 
treatments might distort the functioning of the internal market. 

The  study  found  that  the  information  available  on  e-cigarettes  was  limited  and  it  was  consequently 
difficult  to  draw  conclusions  on  how  the  market  will  evolve  in  the  future.  Moreover,  opinions  on 
possible health effects of e-cigarettes and, consequently, the appropriate tax  treatment  largely  diverge. 
Therefore,  from  a  health  perspective  a  cautious  approach  should  be  adopted  towards  a  potential 
harmonized  taxation  of  e-cigarettes.  The  hypothetical  excise  duty  loss  caused  by  substitution  between 
traditional  cigarettes  and  novel  products  including  e-cigarettes  is  estimated  to  be  less  than  2.5  % 
(EUR 2 billion)  of  the  total  revenue  of  excise  duty  on  cigarettes.  A  positive  tax  rate  might  contribute 
approximately  to  EUR  0.3  –  0.5  billion  to  the  budgets  of  Member  States,  although  enforcement 
difficulties are expected. These figures have to be taken with great caution because the full effects of the 
rules  of  the  Tobacco  Products  Directive,  which  entered  into  force  on  20  May  2016,  particularly  on 
smaller  producers,  are  still  unknown.7  The  Tobacco  Products  Directive  covers  a  broader  range  of 
products than Directive 2011/64/EU, including smokeless tobacco, herbal products for smoking, and in 
particular  e-  cigarettes  and  their  refill  containers.  The  Tobacco  Products  Directive  introduced,  among 
others,  specific  requirements  for  the  packaging,  labelling,  safety,  monitoring  and  reporting  of  e-
cigarettes. 

The Commission supports the recommendation of the external study to adopt a multi-phased approach, 
starting  with  collecting  accurate  data  to  fill  the  information  gap.  Compiling  a  robust  information  or 
evidence base is an essential component of better policy making. The data currently available does not 
provide sufficient evidence to support a proposal for a harmonized approach for taxation of e-cigarettes. 
The Commission expects that more data will become available as a result of the obligations under article 
20 of the Tobacco Products Directive and has decided therefore to revisit the issue in the context of a 
REFIT evaluation and the next regular report on tobacco taxation due in 2019 pursuant to the obligation 
laid  down  in  article  19  of  Directive  2011/64/EU.  By  that  time,  it  is  expected  that  the  effects  of  the 
requirements of the Tobacco Products Directive on the e-cigarette market will also be known better. 

Heat-Not-Burn tobacco products 

6 Italy, Portugal, Romania, Slovenia, Latvia, Hungary, Finland, Greece and Croatia 
7 DIRECTIVE 2014/40/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 3 April 2014 
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 and repealing Directive 2001/37/EC 

3 

 
 
 
 
 
 
                                                            
The study has revealed that by 2016, the Heat-Not-Burn tobacco products have been  subject to large-
scale  commercialisation  in  a  limited  number  of  Member  States  only.  At  present,  Member  States  have 
different approaches towards the tax treatment of these products, varying from taxation at the same rate 
as  smoking  tobacco  under  the  current  directive  (Croatia,  Germany,  Greece,  Latvia,  the  Netherlands, 
Slovakia,  Slovenia,  Romania  and  United  Kingdom)  to  taxation  at  a  different  level  on  a  national  basis 
(Italy, Portugal, Hungary). These different tax treatments have the potential to distort the functioning of 
the internal market.  

Moreover, many Member States have not decided on a fiscal regime, simply because the products are 
not sold on their market. Heat-Not-Burn tobacco products are currently used by less than half a million 
people across the EU and substitution with traditional tobacco products has been found to be negligible.  

The Commission is of the opinion that, given the novelty and evolutionary nature of the market, it would 
be  extremely  difficult  at  this  stage  to  develop  a  harmonized  explicit  definition  which  captures  these 
products  both  as  they  appear  now  and  their  future  developments.  Some  of  these  products  are  already, 
albeit  indirectly,  covered  by  the  directive  because  they  contain  tobacco.  In  the  Commission's  view,  a 
possible treatment of these products would be to tax them at the same rate as smoking tobacco under the 
directive. Again, the Commission has decided to revisit this issue  with the next REFIT evaluation and 
report on tobacco taxation due under article 19 of Directive 2011/64/EU. 

b)  Illicit trade in raw tobacco  

Raw  tobacco  currently  does  not  come  within  the  scope  of  excisable  goods  as  defined  in  Directive 
2011/64/EU. During the evaluation in 2014, it was reported that raw tobacco was being diverted to the 
illicit  circuit.  This  is  because  diverting  raw  tobacco  to  the  illicit  circuit  could  be  an  easier  option 
compared to manufactured tobacco products because monitoring tools such as the Excise Movement and 
Control System (EMCS) are not used to monitor movements of raw tobacco. Illicit trade in raw tobacco 
is  estimated  at  approximately  10  000  tonnes  per  year,  about  1  %  of  the  EU  raw  tobacco  market.  If 
cigarettes were produced from this amount of raw tobacco, this could cause a tax evasion between EUR 
1 and 2 billion, amounting to 1.6 to 2.7 % of the current revenues from cigarettes.  

Including  raw  tobacco  in  the  scope  of  excisable  goods  would  enhance  control  but  would  also  impose 
administrative  and  compliance  costs  on  all  legitimate  operators.  These  costs  are  high  compared  to  the 
value of production; about 35 % of the market price of EU raw tobacco. Compared to the overall EU 
raw  tobacco  market,  these  costs  would  represent  about  8  %  of  its  value.  This  would  lead  to  loss  of 
competitiveness  of  EU-grown  tobacco  compared  to  imported  tobacco.  The  regulatory  costs  consist  of 
setting up and receiving authorisation to operate a tax warehouse and setting up and moving goods under 
the EMCS system. This would give an advantage to growers and first processors outside the EU which 
would not have to bear these costs but could still export (raw) tobacco to the EU. Moreover, the amount 
of tax evaded that might possibly be recovered as a result of EMCS monitoring is unlikely to outweigh 
the administrative and compliance costs incurred by economic operators and, to a lesser extent, public 
authorities.  
The  Commission  would  therefore  support  the  recommendation  of  the  external  study  which  concludes 
that including raw tobacco in the scope of excisable goods would be disproportionate and that similar 

4 

 
 
 
 
 
 
 
benefits  might  be  achievable  at  lower  costs  by  a  common  regulatory  framework  for  growers  and  first 
processors  in  the  EU.  Some  Member  States  have  already  introduced  a  national  regulatory  framework 
which requires economic operators to register and keep records of stocks and the flows of raw tobacco.  

c)  Tax-induced substitution of cigarettes by low-price cigarillos 

The  minimum  excise  duty  rate  applicable  to  the  category  of  ''cigars  and  cigarillos''  is  lower  than  for 
cigarettes. Borderline cigarillos have characteristics similar to cigarettes but can be sold for a lower price 
because  they  are  classified  as  cigarillos  and  benefit  from  a  more  favourable  tax  treatment.  Such 
borderline  products  might  cause  a  reduction  of  revenue,  distortion  of  competition  and  undermine 
tobacco-control policies.  

The  study  found,  however,  that  tax-induced  substitution  of  cigarettes  by  borderline  cigarillos  had 
significantly  declined  due  to  the  entry  into  force  on  1  January  2015  of  a  revised  definition  of  the 
category  ''cigars  and  cigarillos''  in  the  directive  and  the  consequential  adoption  of  appropriate  tax 
structures by Member States.8  

Therefore the Commission supports the recommendation of the external study that there is little rationale 
for further action on this matter at EU level. Moreover, the directive allows Member States to develop a 
tax  structure  reducing  the  incentive  for  low-price  cigarillos  which  are  competing  with  cigarettes. 
Member States could for example introduce or increase specific taxes or a minimum excise duty for this 
product category. 

d)  Tax-induced substitution of cigarettes by fine-cut tobacco 

The minimum excise duty rate applicable to fine-cut smoking tobacco is lower than for cigarettes. The 
difference  in  the  tax  level  could  act  as  an  incentive  for  substitution  of  cigarettes  by  fine-cut  tobacco, 
leading  to  revenue  losses  and  undermining  tobacco-control  policies.  As  expressed  in  the  recitals  of 
Directive 2011/64/EU, it was found desirable to bring the minimum levels for fine-cut tobacco closer to 
the  minimum  levels  applicable  to  cigarettes,  taking  into  account  competition  and  the  equally  harmful 
character of both products. Fine-cut tobacco is largely a substitute for cigarettes and currently counts for 
almost 20 % of total tobacco consumption. In the directive, gradual increases are still foreseen for fine-
cut tobacco in 2018 and 2020 to bring the overall minimum rates closer to the rates for cigarettes. The 
fine-cut tobacco market had been growing between 2006 and 2012 and then stabilized between 2013 and 
2016  in  the  EU  due  to  adjustment  of  tax  policies  and  market  saturation.  Various  scenarios  have  been 
considered  in  the  study  which  could  mitigate  the  incentive  for  substitution.  Effects  largely  diverge, 
depending on the scenario and also between Member States. Given the large share of SMEs in the fine-
cut  tobacco  market,  any decline would have proportionally a larger impact on  SMEs compared to big 
tobacco companies.  

8 See also the derogation for DE and HU until 31 December 2014 in article 4 (2) of Directive 2011/64/EU 

5 

 
 
 
 
 
 
 
 
 
 
                                                            
Most Member States already tax fine-cut tobacco well above the overall minimum rate. A change to the 
minimum rate would therefore have little effect in this regard, particularly as in a few cases, the tax rates 
applicable  to  fine-cut  tobacco  and  cigarettes  have  already  been  aligned.  A  greater  impact  might  be 
expected if Member States were to 'peg' the tax treatment of fine-cut tobacco to cigarettes. To this end, it 
should  be  noted  that  the  directive  neither  prevents  Member  States  from  aligning  the  rates  of  fine-cut 
tobacco and cigarettes nor from 'pegging' the rates of these product categories. The directive is silent on 
these points thereby allowing Member States to decide on appropriate measure to address substitution of 
cigarettes  by  fine-cute  tobacco.  In  view  of  the  freedom  the  directive  leaves  Member  and  the  visible 
stabilization of the market, the Commission is of the opinion that, in line with the external study, further 
action at EU level would have no obvious added value.  

e)  Illicit trade in water-pipe tobacco 

Water-pipe tobacco is currently classified as 'other smoking tobacco' in Directive 2011/64/EU. It appears 
that  water-pipe  tobacco  has  experienced  a  high  level  of  illicit  trade.  Data  on  water-pipe  tobacco  is 
scarce, but it would seem that most of these products are imported. Overall consumption in the EU is 
estimated to be at 5 000 tonnes per year, of which two-third is estimated to be non-duty paid. Although 
significant  in  proportional  terms,  water-pipe  tobacco  remains  a  niche  product  in  absolute  terms  as 
compared to other products. A separate product category would allow Member States to tax water-pipe 
tobacco at a different level from 'other smoking tobacco'. However, while a separate category for water-
pipe tobacco and an adjusted lower rate could be beneficial in eliminating the incentive for illicit trade, 
more favourable rates could act as an incentive for the development of further borderline products.  In 
line with the external study, the Commission is of the opinion that the available data is too limited and 
unreliable to support a major tax reform such as the introduction of a separate category for water-pipe 
tobacco at the present time. 

f)  Minimum Excise Duty on cigarettes 

The  directive  allows  Member  States  to  set  a  ''tax  floor'',  also  known  as  a  Minimum  Excise  Duty, 
provided  that  the  overall  mixed  structure  is  respected.  No  specific  method  of  calculation  of  this 
Minimum Excise Duty is provided in the directive. However, both economic operators liable to pay the 
excise duty and tax  administrations indicated  in the study that the Minimum Excise  Duty works well. 
The room for application of the rules given by the directive is appreciated by Member States because it 
enhances the flexibility they have in achieving the objectives of the Minimum Excise Duty. At the same 
time,  in  light  of  the  various  technical  terms  used  in  the  directive  which  could  lead  to  confusion 
concerning  the  calculation  of  Minimum  Excise  Duty,  a  clarification  may  become  necessary  to  allow 
Member States to make use of this provision against low price cigarettes in a more efficient manner.  

4)  Conclusion and way forward 

6 

 
 
 
 
 
 
 
 
In this report the Commission has explained the reasons why no proposal to revise or amend Directive 
2011/64/EU  will  be  tabled  in  2017.  The  main  reasons  are  the  lack  of  data  necessary  to  underpin  a 
proposal  for  harmonized  taxation  of  e-cigarettes  and  the  fact  that  some  issues  identified  in  the 
evaluation of 2014 have since been solved at national level or have been settled. The question whether 
there is a need to propose a harmonized explicit category for e-cigarettes and Heat-not-Burn tobacco 
products will be re-considered in the context of the next REFIT evaluation and report on the directive 
due in 2019.  

The REFIT evaluation will cover the outstanding issues which the external study could not conclude 
on  including  e-cigarettes  and  Heat-Not-Burn  tobacco  products.  It  is  expected  that  more  information 
will  become  available  from,  among  other  sources,  the  reporting  obligation  under  article  20  of  the 
Tobacco  Products  Directive.  The  Commission  will  therefore  continue  to  monitor  the  developments 
related to e-cigarettes and Heat-Not-Burn tobacco products. 

Finally, the Commission considers that a review of the minimum rates applicable under the Directive 
should also take place in parallel with the REFIT evaluation. According to Article 19, paragraph 1 of 
Directive  2011/64/EU  the  Commission  is  required  to  submit  a  report  on  the  rates  and  structure  of 
excise duty laid down in this Directive every four years. The last report was submitted in 2015 and the 
next  report  will  be  due  in  2019.  In  the  last  evaluation  finalized  in  2014,  minimum  rates  were  not 
examined because some of the current transitional periods had not yet ended and not all increases had 
entered into force. Currently almost all Member States, except Bulgaria, Hungary and Romania, have 
reached  the  overall  minimum  rates.  By  2019,  when  the  next  report  and  possible  revision  are  due,  it 
will have been almost 10 years since the current minimum rates were approved and no correction for 
the effects of inflation has been applied. In an annex to the Council Conclusions of 8 March 2016, five 
Member  States  supported  the  conclusion  that  the  work  on  a  future  revision  of  the  minimum  rates 
should  be  started  without  delay.9  Moreover,  bearing  in  mind  the  serious  harm  to  health  of  tobacco 
products, it should be taken into account that article 168 of the Treaty on the functioning of the EU 
requires a high protection of public health and that the EU is a party to the Framework Convention on 
Tobacco Control (FCTC). For these reasons, the Commission now believes that the examination of the 
need  to  increase  minimum  rates  should  also  take  place  in  parallel  with  the  REFIT  evaluation. 
Therefore, the Commission will start the evaluation of the minimum rates in 2018.  

9 Austria, Ireland, Finland, France and Sweden 

7