The FINANCIAL — The European Commission report proposed a Directive to amend the current EU excise duty legislation on tobacco. The draft Directive foresees a gradual increase in the EU minimum taxation levels on cigarettes and fine cut tobacco up to 2014.
It also updates the definitions of different types of tobacco products so as to remove loopholes which allow certain cigarettes or fine cut tobacco to be presented as cigars, cigarillos or pipe tobacco and therefore benefiting from a lower tax rate.
Recommendation also aims to contribute to reducing tobacco consumption by 10% within the next 5 years.
“Today's proposal supports the EU policy to reduce tobacco consumption and narrow the differences in price levels of tobacco products within the EU”, László Kovács, Commissioner for Taxation and Customs Union said. “It will help reduce illicit trade and cross-border shopping, which undermine the revenue and the health objectives of Member States which impose high taxes to deter smoking. It will give more flexibility to Member States on setting minimum tax levels and will modernise the current rules so as to ensure a level playing field for producers and retailers".
At present, there are considerable differences in taxation levels between the lowest and the highest taxing Member States. For cigarettes, the difference can be up to almost 600% of the excise burden expressed in Euros. As a result of this great divergence in taxation levels within the Union it is estimated that the total market penetration of the non-domestically taxed consumption represented in 2004 approximately 13% of the tobacco market in the EU-25. In a number of main markets, this figure even rises to more than 20%.
Currently, excise duties levied on cigarettes must account for at least 57% of price, and must be at least €64 per 1000 cigarettes, for products falling under the "most popular price category" in that country.
Currently, excise duties levied on cigarettes must account for at least 57% of price, and must be at least €64 per 1000 cigarettes
The concept of the "most popular price category" was designed more than thirty years ago, when national markets were dominated by one brand that was clearly ‘most popular’. Nowadays, markets are more dynamic with several popular brands and regular price changes. In order to create more transparency and to ensure a level playing field for manufacturers, the Commission proposes replacing the most popular price category with a weighted average price of all cigarettes for determining the tax base. In order to underscore health objectives it will be combined with a monetary minimum tax applicable to all cigarettes.
The current percentage of 57% will be increased to 63% of the weighted average price and the rate of €64 will rise to €90 for all cigarettes by 2014, under the new proposal. It is estimated that this will contribute to a 10% decrease in tobacco consumption in most Member States within the next 5 years.
“The Commission also proposes giving Member States more flexibility in tobacco taxation. This will be ensured by abolishing the existing rule which forbid Member States to levy a minimum excise tax higher than 100% of the total excise on the most popular price category. Furthermore, the Commission proposes to widen the band of the specific component of the excise duty from 5% – 55% to 10% – 75%”.
“For cigars and cigarillos, proposal amends the definition of these products, so as to ensure that the lower minimum rate is restricted to "traditional cigars and cigarillos". This amendment is necessary due to the fact that some new tobacco products are presenting themselves as cigars / cigarillos in order to benefit from the reduced tax rate, despite being similar in function, taste, filter and presentation to a cigarette. The definition of pipe tobacco will also be adapted to better differentiate between pipe tobacco and fine-cut tobacco, as a number of Member States have reported tobacco being sold as pipe tobacco when its primary purpose is for hand-rolling or tubing of cigarettes”.
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