excise duty/tobacco

Taxation of tobacco products
in the European Union
Frank Van Driessche
DG Taxation and Customs Union
May 2006
1

Legislation on taxation
Directive 92/79/EEC (Approximation of taxes on
cigarettes)
Directive 92/80/EEC (Approximation of taxes on
manufactured tobacco other than cigarettes)
Directive 95/59/EEC (Taxes other than turnover
taxes which affect the consumption of
manufactured tobacco)
Codification of the three Directives is in preparation
2

Main objectives of legislation
Improve the operation of the internal market:
– Establish minimum excise duties
– Approximate the structure of excise duties
Prevent distortion of competition between
different tobacco products
Safeguard free determination of the
maximum retail selling price
NB No health policy objectives!
3

Tobacco product categories
Cigarettes (majority of market)
Cigars and Cigarillos
Smoking tobacco
– Fine-cut Fine cut tobacco for the rolling of cigarettes
– other smoking tobacco
4

Taxation of Cigarettes
5

tax
Optional
minimum
duty
Structure of excise duties
MPPC
MPPC – Most Popular Price Category
ad valorem
duty
EU minimum duty (57% and €
60/64 per 1000 of MPPC)
specific
duty
price
National taxes:
•Specific excise duty
•Ad valorem excise duty
•VAT
6

Characteristics of EU taxation
system of cigarettes
Combination of ad valorem and specific duty
– Compromise between southern MS (producing
raw tobacco and preferring ad valorem taxation)
and northern MS (not producing raw tobacco
and preferring specific duty)
– National brands of southern MS are produced
with their own, cheaper, national tobacco. Ad
valorem system favors these products over
cigarettes of international brands, produced with
more expensive tobacco
7

Taxation structure on
cigarettes
Excise duty on cigarettes must consist of a SPECIFIC and
an AD VALOREM element
– Specific:
A fixed amount per 1000 cigarettes
between 5% and 55% of total tax (excise + VAT)
– Ad valorem:
A percentage of Tax ax Inclusive nclusive Retail etail Selling elling Price rice
(TIRSP)
– The specific amount and the ad valorem % are
applied to cigarettes of all price categories
8

Minimum overall excise duty on
cigarettes
Minimum level of taxation
– 57% of the TIRSP of cigarettes and
– € 60 per 1000 cigarettes (€ ( 64 from 1/07/2006)
– Both established by reference to MPPC
(Most Popular Price Category)
9

Derogations and transition periods
MS with minimum excise duty of at least € 95/1000 (€ (
101/1000 since 1/07/2006) for MPPC do not need to
comply with 57% rule (Sweden, Denmark)
Transition period for Greece and Spain: € 64 have to be
reached by 1/1/2008 (though currently Greece has €
78/1000 and Spain € 69/1000)
Transition periods for the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia:
€ 64 have to be reached by 31/12/2007 – 31/12/2009
Transition period for France: lower excise duties can be
levied to cigarettes for Corsica until 31/12/2009
10

Optional minimum excise duty
Legal basis
– Article 16(5) of 95/59/EEC (cigarettes)
Requirements:
– Applied to cigarettes sold at price lower than
MPPC
– Cannot exceed the excise duty levied on MPPC
17 MS introduced a minimum excise duty on
cigarettes
11

Example (pack of 20)
Pre tax price (excluding taxes) 0.7 EUR
TIRSP EUR
Excise duty
- Specific: 1 EUR
- Ad valorem: 0.8 EUR (27% of TIRSP)
- Total: 1.8 EUR (60% of TIRSP)
____________
Price excluding VAT 2.5 EUR
VAT 20% 0.5 EUR
____________
TIRSP (including taxes) 3 EUR
Notes: - Total tax (excise + VAT) = 2.3 EUR or 77% of TIRSP
12

Tax and TIRSP differentials in MS (I)
After the enlargement, the differentials have
widened (EU15: 1/4, EU25: 1/7)
Resulting from differences in:
– Pre-tax Pre tax prices (depending on purchasing power)
and retail margins
– Excise duty rates
– Structure of excise duties
– VAT (15-25%) (15 25%) on tobacco products (multiplier effect)
13

Average pre-tax pre tax prices in 2004 in
100,00
90,00
80,00
70,00
60,00
50,00
40,00
30,00
20,00
10,00
0,00
Aus tria
Belgium
C yp rus
EUR/1000
C zech Republi
Denmark
Estonia
Finland
France
G ermany
G reece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Slovak R epub li
Slove nia
Spain
Sweden U K
14

Relationship between PPS, pre-tax pre tax
PPS
250,00
200,00
150,00
100,00
50,00
0,00
Austria
Belgium
Cyp rus
Czech Republic
Denmark
prices and TIRSP
Purchase Pow er Standard Average TIRSP in EUR Average pre-tax price in EUR
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Slova k Republic
Slovenia
Spain
Sweden
UK
350,00
300,00
250,00
200,00
150,00
100,00
50,00
0,00
TIRSP and pre-tax price in EUR
15

Tax and TIRSP differentials in MS (I)
After the enlargement, the differentials have
widened (EU15: 1/4, EU25: 1/7)
Resulting from differences in:
– Pre-tax Pre tax prices (depending on purchasing power) and retail margins
– Excise duty rates
– Structure of excise duties
– VAT (15-25%) (15 25%) on tobacco products (multiplier effect)
16

Excise duty rates in MS (on MPPC)
70%
60%
50%
40%
30%
20%
10%
0%
Excise tax incidence on MPPC
Jan 2005 (% of MPPC)
64% 63% 62% 62% 61% 61% 59% 59% 59% 58% 58% 58% 57% 57% 57% 57%
55% 54% 54%
52%
50%
46% 46% 45% 45%
F UK D P IRL M CY A I E B FIN GR L SI NL DK PL H EST S SK LT LV CZ
57%
2
17

Average excise duty rates in MS
Average %
70%
60%
50%
40%
30%
20%
10%
0%
Average % of excise duties in TIRSP
LV
LT
CZ
SE
SK
EE
HU
PL
AU
DK
SI
NL
BE
LU
ES
CY
IT
FI
MT
EL
IE
DE
PT
FR
UK
EU Member States
18

240
220
200
180
160
140
120
100
80
60
40
20
0
221
Excise duty rates in MS (in
191
160
127
115 114 110 106 105 103
EUR/1000)
Excise tax yield on MPPC
Jan 2005 (Euro/000)
88
85
82
78 78
74
61
50
46
40
33 31 30
64 Euro / 000
20 19 17
UK IRL F D FIN DK M S NL B A CY I L GR P E SI H SK PL CZ EST LT BLG RO LV
13
3
19

Tax and TIRSP differentials in MS (I)
After the enlargement, the differentials have
widened (EU15: 1/4, EU25: 1/7)
Resulting from differences in:
– Pre-tax Pre tax prices (depending on purchasing power) and retail margins
– Excise duty rates
– Structure of excise duties
– VAT (15-25%) (15 25%) on tobacco products (multiplier effect)
20

Tax and TIRSP differentials in MS (I)
After the enlargement, the differentials have
widened (EU15: 1/4, EU25: 1/7)
Resulting from differences in:
– Pre-tax Pre tax prices (depending on purchasing power) and retail margins
– Excise duty rates
– Structure of excise duties
– VAT (15-25%) (15 25%) on tobacco products (multiplier
effect)
22

Total tax yield (including VAT)
280
260
240
220
200
180
160
140
120
100
80
60
40
20
0
273
Total tax yield (excise and VAT) on MPPC
Jan 2005 (EUR/000)
245
201
156 155
151 148
137
134 133
113
105 103
98 96 93
VAT
Excise tax yield
UK IRL F DK D FIN S M NL B A I CY GR L P E SI H SK PL CZ EST LT LV
75
65 62
54
44 42
38
27
18
4
23

TIRSP differentials in MS
€6.25
€6.98
Retail selling price MPPC
€5.00
Jan 2005 (EUR/20)
€3.68
€3.56
€2.72
€3.82
€8.08
€4.17
€4.11
€2.40
€2.10
€2.80
€1.39
€3.00
€1.75
€1.84
€4.26
€0.51
€3. 61
€1.21
€1.75
€ 0.43
€1.69
€0.38
€0.79 €0.47
€2.70
€4.00
€0.90
€1.15
€0.60
€0.51
€0.37
€0.67
€0.43
€2.87
24
6

Tax and RSP differentials in MS (II)
Consequences:
– Increased cross border shopping
– Contraband
Countries affected:
– France, UK, Germany (inflow from low taxing
MS)
– Low taxing MS (inflow from Romania, Russia,
Belarus, Ukraine)
25

Taxation of other tobacco
products
26

Tobacco product categories
Cigarettes (majority of market)
Cigars and Cigarillos
Smoking tobacco
– Fine-cut Fine cut tobacco for the rolling of cigarettes
– other smoking tobacco
27

Cigars and
cigarillos
Fine-cut
tobacco
Other
smoking
tobacco
Minimum level of taxation
Ad valorem
duty (% of max
TIRSP)
OR
Specific duty
(per kg or per
number of
items)
OR
A mixture of
both
5% of TIRSP or € 11 per 1000
items or per kg
36% of TIRSP or € 32 per kg
20% of the TIRSP or € 20 per kg
28

Derogation
Transition period for France: lower excise
duties can be levied to tobacco products for
Corsica until 31/12/2009
29

Optional minimum excise duty
Legal basis
– Article 3 of Directive 92/80 (other tobacco
goods)
Requirements:
– Applied only in cases where the structure of
excise duties is either ad valorem or mixed
30

Recent changes and future
plans
31

Thank you for your attention!
32