EXCISE DUTY ON TOBACCO|
Commission Report on the third review of the structure and rates of the excise duties on tobacco products;
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.
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.
||Article 93 EC; consultation; unanimity
||HM Customs & Excise
|Basis of consideration:
||EM of 23 April and SEM of 25 October 2001
||None; but see footnote below
||Cleared, but relevant to any debate on fraud
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
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".
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
"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
"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
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
"The proposal from the Commission goes some
way towards meeting these objectives and the Government particularly
welcomes the recommended introduction of the cash underpinning
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
"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."
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
| ||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
|Cigarettes||57% 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 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 -|
|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)
euro11 per kilo or per 1,000 items (£6.84)
| ||euro216.54 per kilo
||£134.69 per kilo
||As at 1/1/01
30% per kilo or euro25 (£15.56)
33% per kilo or euro28 (£17.42)
36% per kilo or euro31 (£19.28)
39% per kilo or euro34 (£21.15)
32% or euro27 (£16.80)
33% per kilo or euro29 (£18.04)
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)
euro20 per kilo (£12.44)
| ||euro95.19 per kilo
||£59.21 per kilo
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
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