Select Committee on European Scrutiny Third Report


EXCISE DUTY ON TOBACCO



(22277)
7255/01
COM(01) 133








(22782)
OTNYR

(a)
Commission Report on the third review of the structure and rates of the excise duties on tobacco products;

(b)
Draft Directive amending Directive 92/79/EEC on the approximation of taxes on cigarettes, Directive 92/80/EEC on the approximation of taxes on manufactured tobacco other than cigarettes and Directive 95/59/EEC on taxes other than turnover taxes which affect the consumption of manufactured tobacco.

(c)
Revised Presidency Compromise for Directive amending Directive 92/79/EEC on the approximation of taxes on cigarettes, Directive 92/80/EEC on the approximation of taxes on manufactured tobacco other than cigarettes and Directive 95/59/EEC on taxes other than turnover taxes which affect the consumption of manufactured tobacco.


Legal base: Article 93 EC; consultation; unanimity
Department: HM Customs & Excise
Basis of consideration: EM of 23 April and SEM of 25 October 2001
Previous consideration: None; but see footnote below
Committee's assessment: Politically important
Committee's decision: Cleared, but relevant to any debate on fraud

Background

9.1  Minimum rates of excise duty on cigarettes and other tobacco products were agreed in 1992 and introduced with effect from 1 January 1993. The relevant Directives also provided that the Council should examine the rules and structure of duties every three years, on the basis of a report and, where appropriate, a proposal from the Commission.

9.2  The first review of excise duties on tobacco and tobacco-related products in 1995 led to no change in the tax structure for such products. In 1998, the Commission published its second report, which concluded that only a few technical amendments were necessary, mainly affecting the overall incidence of the minimum duty for cigarettes. The report was accompanied by a proposal for a directive amending the existing Community legislation to incorporate the recommended technical adjustments. The previous Committee cleared the second report and its accompanying proposal on 1 July 1998[11] and reported again in its 15th report in 1998-1999. When adopting the directive, 11 Member States, including the UK, asked the Commission to consider a more fundamental review of the rates and structures of excise duties on tobacco products.

9.3  In his Explanatory Memorandum of 23 April 2001, the then Financial Secretary to the Treasury (Mr Stephen Timms) pointed out that:

    "The duty on cigarettes is a mixture of ad valorem (percentage of the retail selling price, inclusive of all taxes) and specific (per number of items) duties. The specific component of the duty may represent not less than 5% and not more than 55% of the total tax burden (i.e. excise duty and VAT) on cigarettes in the most popular price category (MPPC — the price at which more cigarettes are sold than at any other price. In the UK this equates to the price of the leading brand). The minimum rate for the excise duty on cigarettes is currently an amount equal to 57% of the MPPC".

The documents

9.4  The Commission has produced its third review (document a) into the rules and structure of duties and its proposal (document b) for changes to that structure. In its review, the Commission has acted on the request from 11 Members to consider changes other than mere technical changes to the regime. In his Explanatory Memorandum of 23 April 2001, the then Financial Secretary told us that:

    "In their report, the Commission's stated aim is to establish a reasonable minimum level of taxation at EU level, taking into account inter alia the functioning of the internal market and consumer health protection. The Commission acknowledges the fiscal sovereignty of Member States by stating that, above this minimum level, Member States are free to determine the level of excise duty in the light of national objectives and priorities.

    "The Commission acknowledges that fraud takes place on a large scale in the tobacco sector. The report asserts that fraud involving non­EU countries seems to have increased (compared to a reported decline in intra-Community fraud) and is increasingly organised on a large scale by criminal organisations. This makes it increasingly necessary to implement the recommendations of the High Level Group on Fraud.

    "On health, the Commission notes that a high level of taxation, accompanied by other measures for reducing consumption, will have an impact on consumer behaviour.

    "The Commission report examines ways to increase the actual level of duty on cigarettes within the EU and to more closely align the duty levels of cigarettes and fine­cut tobacco intended for the rolling of cigarettes. The report addresses the real value of excise duty rates on other tobacco products expressed as specific amounts and considers the appropriate duty treatment of products which are effectively cigarettes with a brown wrapping but which currently are classified as cigars or cigarillos and so dutied at a lower rate."

9.5  The Minister described the Commission's proposal:

    "For cigarettes, the Commission proposes that a minimum fixed amount, expressed in euro, should be introduced in addition to the existing minimum percentage requirement for excise incidence. Member States' excise duties would then have to meet two criteria: the 57% rule and 70 euro (£43.34) per 1,000 cigarettes of the price category most in demand. For Member States applying an effective excise charge of at least 100 euro (£61.92) per 1,000 cigarettes, compliance with the 57% rule will not be required.

    "The Commission also proposes that Member States would be able to apply a minimum rate of excise duty on cigarettes provided that this did not exceed the excise duty levied on cigarettes in the most popular price category. The aim being to help deal with any increase in the share of the cigarette market taken by low­priced brands.

    "For hand­rolling tobacco, the Commission proposes gradual increases to the minimum rates, as below. The percentage relates to a percentage of the retail selling price, inclusive of all taxes; the amount, expressed in euro, is per kilogram.

    "For manufactured tobacco products other than cigarettes, the Commission proposes that minimum specific duties be increased in line with the estimated level of inflation up to the period to 31 December 2002.

    "In the interest of what is termed 'uniform and fair taxation', the Commission proposes an amendment to the definition of cigars and cigarillos so that a type of cigar or cigarillos which is similar in many respects to a cigarette is treated as a cigarette for excise duty purposes.

    "On the timing of future reviews, the Commission proposes that the reviews be conducted every four years rather than every three. The four year period would run from the time that discussions in the Council on the previous review are finished."

Government's view on the Commission's proposal

9.6  The then Financial Secretary told us:

    "The underlying aim of the Government's policy objectives for tobacco taxation in the EU context is to deliver increased prices in neighbouring Member States and thereby reduce the incentive for both legal cross­border shopping and smuggling, which undermine health and revenue objectives. The Government has therefore consistently argued for:

    —  higher minimum rates for all tobacco products — to increase the overall minimum duty charge;

    —  for cigarettes, an increase in the total tax burden that can be taken up by the specific duty element of cigarette duty (the 5% to 55% range) — to reduce the proportion of duty which is based on retail prices which may be very low in some Member States;

    —  cash underpinning of the minimum rate for cigarettes — to establish a minimum rate based on an actual cash value. The existing percentage rate based on retail price are of little value in Member States where retail prices are low.

    "The proposal from the Commission goes some way towards meeting these objectives and the Government particularly welcomes the recommended introduction of the cash underpinning for cigarettes."

9.7  The Commission's proposals for the minimum rates of duty will have no effect on current UK tobacco duty rates, which for a number of products are many times greater than the proposed minimum rates. The figures are set out in table 1.

9.8  However, the Commission's proposal, if adopted, would require increases in the duty rates on cigarettes in the following Member States: Austria, Greece, Italy, Luxembourg, Portugal and Spain. The Minister noted that the Commission report refers to the possibility of a phased introduction of the 70 euro cash underpinning of the cigarette minimum rate for Member States where the "immediate introduction of this minimum euro amount would be problematic for economic reasons". As regards duty rates on hand­rolling tobacco, under the Commission's proposal these would need to be increased in Belgium, Luxembourg, Portugal, and Spain.

9.9  The Minister told us:

    "The proposed increases represent a welcome step in the right direction and, if adopted, will provide a useful foundation for future increases in the minimum rates. We do not anticipate cross­border shopping, where EU duty differentials are key, to be affected to any degree.

    "Most illicit cigarettes are smuggled into the UK in large freight consignments from outside the EU having borne little or no tax. Duty differentials in the EU are irrelevant to this problem. By contrast most hand­rolling tobacco smuggled into the UK is EU tax­paid product sourced particularly from Belgium and Luxembourg which, under the Commission proposal, will be required to increase their duty rates. As the price of tax­paid tobacco rises so the costs to the smuggler of having it seized by Customs rises. Before taking into account the much enhanced enforcement effort which is resulting from the Government's strategy for tackling tobacco smuggling, the costs of smuggling rise directly as a result of rising prices. Consequently although HRT in Belgium and Luxembourg will remain significantly cheaper than in the UK, profits to the smuggler will be hit.

    "The Commission's references to tobacco taxation being an important element in policies aimed at reducing smoking, and therefore protecting public health, and the right of Member States to determine the level of excise duty in the light of national objectives and priorities, subject only to the minimum rates are particularly welcome. They support UK health and revenue objectives.

    "We are consulting the tobacco manufacturing companies to establish whether any products for the UK market would be affected by the proposed amendment to the definition of cigars/cigarillos. We are not currently aware of any products that would be affected.

    "The Government welcomes the intention to maintain the regularity of reviews of the EU minimum rates.

The Belgian Presidency's compromise proposals

9.10  The Commission's proposal for increases in minium duty rates was unlikely to be agreed by a number of Member States selling low-priced tobacco products. On 24 October 2001 the Belgian Presidency issued a compromise text, amending the Commission's proposal. The main changes incorporated into the Presidency's compromise proposal relate to cigarettes, hand rolling tobacco and transitional arrangements. The Minister now responsible for the subject, the Financial Secretary to the Treasury (Mr Paul Boateng) outlines the changes proposed by the Presidency compromise text. He says:

    "The Commission originally proposed that a minimum fixed amount, expressed in euros, should be introduced in addition to the existing minimum percentage requirement for excise incidence. Member States' excise duties would then have to meet two criteria: 57% of the tax inclusive retail selling price (TIRSP) and 70 Euro (£43.54) per 1,000 cigarettes of the price category most in demand. For Member States applying an effective excise charge of at least 100 euros (£62.20) per 1,000 cigarettes, compliance with the 57% rule would not be required.

    "Under the compromise, the proposal for a fixed minimum amount has been changed to 60 Euro (£37.32) from 1 July 2002 rising to 64 Euro (£39.80) w.e.f. 1 July 2006. The Presidency proposes that Member States who at 1 July 2001 apply a fixed minimum amount of less than 60 Euro per 1000 cigarettes have until 31 December 2004 to reach that level, and Spain would be given a derogation to implement the rise to 64 Euros by 1 July 2007 at the latest. Compliance with the 57% rule would not be required for Member States applying an effective excise charge of at least 95 Euro (£59.09) w.e.f 1 July 2002, rising to 101 Euro (£62.82) per 1000 cigarettes w.e.f 1 July 2006.

    "The compromise text would allow Germany a derogation to postpone the implementation of the new definition of cigars and cigarillos until 1 January 2007."

9.11  The Presidency's Compromise proposals are set out in table 1.

The Government's view on the Presidency compromise

9.12  In his Explanatory Memorandum of 28 October 2001 the Minister says:

    "The Government's policy objectives for tobacco taxation in the EU context is to support EU wide health policies by increasing tobacco prices across the EU to encourage a reduction in consumption of tobacco products.

    "In particular, the Government has consistently argued for a cash underpinning of the minimum rate for cigarettes. Consequently, it welcomes the principle of cash underpinning which has been retained in the compromise text. The UK supports the principle of uprating the cash underpinning amount of Euro 60 from 1 July 2002 to Euro 64 from 1 July 2006.

    "The UK also welcomes the proposal that Member States which levy an overall minimum excise duty of at least 95 Euros per 1000 cigarettes (which equates to about £1.18 on a packet of 20) need not comply with the 57% rule. This means that Member States who have difficulty complying with the 57% rule despite having high monetary duty need not raise their rates, (which would take them even further ahead of the lower taxing Member States). Given that the current UK duty rate is 64.61% of the tax inclusive retail selling price, it is not affected by this provision."

Conclusion

9.13  We note that the Commission's proposal and the Presidency compromise proposal go beyond the mere technical adjustments that were proposed in the previous review. If adopted, the Commission's proposal and, to a lesser extent, the Presidency compromise, will lead to increases in the minimum duty rates on tobacco and tobacco-related products levied in a number of Member States. This move is in line with the Government's policy of supporting EU-wide health policies by increasing tobacco prices across the EU to encourage a reduction in the consumption of tobacco products.

9.14  We note also that the changes proposed by the Commission and the Presidency will not affect the smuggling of cigarettes from outside the EU, which arrive in the UK with little or no tax paid. Alternative anti-smuggling measures will be required to deal with such smuggling, which may be on the increase. On a brighter note, the proposed tax changes will have some effect on the smuggling of most hand­rolling tobacco that enters the UK, which arrives with EU tax­paid and is sourced particularly from Belgium and Luxembourg. Under the Commission's proposal, and to a lesser extent the Presidency's compromise proposal, such countries will be required to increase their duty rates, which will inevitably reduce the profit margin enjoyed by such smugglers. We welcome such changes. We have no questions and clear all three documents.

  
Current Minimum Rates
Commission's Original Proposal
Presidency Compromise Text
UK Duty as at 7.3.2001 in euros
UK Duty as at 7.3.2001
Cigarettes57% of the retail selling price of cigarettes in the most popular price category, specific component of excise duty to be between 5% and 55% of the total tax burden 57% of the retail selling price of cigarettes in the most popular price category and euro70 per 1,000 cigarettes

Compliance with the 57% rule would not be required for Member States applying an effective excise charge of at least euro100 (£62.20)
57% of the retail selling price of cigarettes in the most popular price category and euro60 per 1,000 cigarettes w.e.f 1/7/2002[12] and euro64 w.e.f 1/7/2006.

Compliance with the 57% rule would not be required for Member States applying an effective excise charge of at least euro95 (£59.09) w.e.f the date of adoption of the Directive 1 July 2002, rising to euro101 (£62.82) per 1000 cigarettes w.e.f 1/7/2006.
Current most popular price category per 1,000 cigarettes -
euro224.89
An amount equal to 22% of the retail price plus £92.25 per 1,000 cigarettes
Cigars and cigarillos as at 1/1/01
euro10 per kilo or per 1,000 items (£6.19)
w.e.f. 1/1/03
euro11 per kilo or per 1,000 items (£6.84)
 euro216.54 per kilo £134.69 per kilo
Hand-rolling tobacco As at 1/1/01

30% per kilo or euro25 (£15.56)
w.e.f. 1/1/02
33% per kilo or euro28 (£17.42)

w.e.f. 1/1/03
36% per kilo or euro31 (£19.28)

w.e.f. 1/1/04
39% per kilo or euro34 (£21.15)
w.e.f. 1/1/02
32% or euro27 (£16.80)

w.e.f. 1/1/03
33% per kilo or euro29 (£18.04)

w.e.f. 1/1/04
36% per kilo or euro32 (£19.90)
euro155.64 per kilo £96.81 per kilo
Other smoking tobacco as at 1/1/01
euro19 per kilo (£11.82)
w.e.f. 1/1/03
euro20 per kilo (£12.44)
  euro95.19 per kilo £59.21 per kilo

Notes:

    w.e.f.: with effect from.
    The percentage relates to a percentage of the retail selling price, inclusive of all taxes: the amount expressed in euros is per kilogram.
    Exchange rate euro1 = £0.6219


11  (19176) 8253/98; see HC 155-xxxii (1997-98), paragraph 4 (1 July 1998) and HC 34-xv (1998-99), paragraph 4 (30 March 1999). Back

12  The Presidency proposes that Member States which at 1 July 2001 apply a fixed minimum amount of less than 60 euros per 1000 cigarettes have until 31 December 2004 to reach that level, and Spain would be given a derogation to implement the rise to 64 euros by 1 July 2007 at the latest.  Back


 
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