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Commission proposes revision of excise duty rules for tobacco products

European Commission - IP/01/368   15/03/2001

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IP/01/368

Brussels, 15th March 2001

Commission proposes revision of excise duty rules for tobacco products

The European Commission has proposed a Directive introducing significant revisions to the rates and structure of excise duties on manufactured tobacco. For cigarettes, the Commission is proposing a minimum fixed amount of excise duty of €70 per 1000 cigarettes in the most popular price category, in addition to the existing minimum excise requirement of 57% of the retail price (inclusive of all taxes) for the category most in demand, so as to ensure greater approximation of tax levels between Member States. The Commission proposal also provides for taxation similar to that of cigarettes for competing tobacco products such as fine-cut tobacco, so as to reflect increasing health concerns. The Commission proposal provides for increases in the minimum amounts of tax on cigars, cigarillos and smoking tobacco to adjust for inflation. The Commission has made these proposals in the light of a study of tobacco taxation that shows how present differences in excise rates for tobacco products between Member States disrupt the smooth functioning of the Internal Market. The changes are also necessary to achieve the wider objectives of the Treaty, including health protection, as well as to protect Member States' tax revenues.

"The proposal for a Directive would ensure a fair and reasonable level of taxation of all tobacco products sold in the EU," commented Taxation Commissioner Frits Bolkestein. "The proposal is necessary to narrow differences between Member States' tobacco taxation levels and so help to tackle fraud and smuggling."

The Commission's report on the structure and rates of tobacco taxation in the EU, published simultaneously with the proposal, includes an analysis of the ratio of price to excise rates for tobacco products in the EU. This shows that there are at present considerable differences in taxation between the lowest and the highest taxing Member States. For cigarettes of the most popular price category the difference can be up to 400% of the excise burden expressed in Euros.

Cigarettes

The minimum rate of excise duty on cigarettes is at present set at 57% of the retail-selling price (inclusive of all taxes) for cigarettes of the most popular price category in each Member State. In order to guarantee a minimum level of excise duties on cigarettes in all Member States and to achieve more rate convergence, the proposal provides for the introduction of a fixed minimum amount of excise duty of €70 per 1000 cigarettes in the most popular price category in addition to the minimum excise incidence of 57 % of the retail selling price.

However, Member States that already charge a high level of excise duty (more than €100 per 1000 cigarettes) would be allowed greater leeway in setting their rates and would not have to apply the 57% minimum incidence rule. In order that Member States can ensure that cigarettes are not sold at prices too far below normal market levels in the domestic market they are currently authorised to set overall minimum levels so as to ensure that each packet of cigarettes bears at least a minimum amount of excise duty. But to allow them more flexibility, the proposal increases the present limit on such minimum taxation.

The current minimum rates on manufactured tobacco other than cigarettes are as follows:

Cigars and cigarillos: 5% of the retail selling price inclusive of all taxes or €10 per 1000 items or per kilogram;

Fine-cut smoking tobacco (rolling tobacco) intended for the rolling of cigarettes: 30% of the retail selling price inclusive of all taxes or €25 per kilogram

Other smoking tobacco: 20% of the retail selling price inclusive of all taxes or €19 per kilogram

Fine-cut tobacco (rolling tobacco)

Notwithstanding the fact that cigarettes and fine-cut tobacco intended for the rolling of cigarettes have different characteristics, they are both harmful for the health and in that sense there is little justification for a wide variation in the minimum rates applicable to these products at Community level. Therefore, the Commission proposes a gradual (spread over 3 years) and partial (up to two thirds) alignment of the minimum rate for fine-cut tobacco to the minimum excise incidence for cigarettes of 57%. In addition, an adjustment to take into account the rate of inflation for the period between 1 January 2001 and 31 December 2002 has been incorporated into the proposal. The following rates and amounts are, therefore, proposed:

  • 1/1/2002: minimum rate of 33 % of the retail selling price inclusive of all taxes or €28 per kilogram

  • 1/1/2003: minimum rate of 36 % of the retail selling price inclusive of all taxes or €31 per kilogram

  • 1/1/2004: minimum rate of 39 % of the retail selling price inclusive of all taxes or €34 per kilogram.

Other smoking tobacco

The specific minimum rate for other smoking tobacco will only be adjusted for inflation and will be set at €20 at 1 January 2003. There will be no change to the ad valorem rate.

Cigars and cigarillos

The Commission proposal would also amend the definition of cigars and cigarillos in order to restrict the application of the lower minimum rate for cigars to the labour intensive products to which it originally was meant to apply (cigars and cigarillos). Such a restriction is necessary due to the fact that a product which in terms of function, taste, filter and presentation can be regarded as a cigarette or cigarette substitute, except that it has the colour of a cigar, has recently become successful on a number of national markets.

Application of the current definition obliges Member States to tax the product at the rate of excise duties for cigars (5% minimum) instead of the excise duties for cigarettes (57 % minimum). Due to the lower tax rate, the product is cheaper and quite attractive, especially for young smokers. In addition, the Commission proposal would adjust the specific minimum amounts for cigars and cigarillos for inflation, with the effect that the specific minimum for cigars and cigarillos would be fixed at €11 from 1 January 2003.

Periodic review of tobacco excise duties

Excise duty legislation at present provides for a review of the structure and rates of excise duties on tobacco every three years. The Commission feels that this does not give enough time to evaluate any changes introduced and it therefore includes in its proposal provision for an increase in the review time period to four years.

Background

The Commission review which led to this report and proposal was its third review of excise duties on tobacco products since the adoption of a Community framework for the taxation of tobacco products in the Internal Market in 1993. This Community framework provides for a common structure (product definitions and means of taxation) for excise duty on tobacco products as well as for minimum rate levels, above which Member States are free to set their national rates. For information on the first and second reviews see IP/95/977 and IP/98/485. The third review was more comprehensive than previous reviews as a result of the request by a large number of Member States for the Commission to carry out a more fundamental examination of the rates and structures of excise duties on tobacco products. The review included a broad consultation process involving national administrations, business and interest groups.

The full text of the proposal and the report are available on the Europa website at:

http://ec.europa.eu/taxation_customs/whatsnew.htm


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