Closing the tobacco loopholes

EU finance ministers will next week (11 November) try to agree an increase in the minimum rates of excise duty on cigarettes and other tobacco products. 

The proposal under discussion would raise the minimum excise rate to €90 per 1,000 cigarettes, compared to €64 today. The legislation would also close loopholes that have allowed companies to market cigarettes as cigars and cigarillos, and some fine-cut tobacco as pipe tobacco. Tobacco companies have exploited these loopholes to benefit from lower tax rates applied to those products.

The European Commission proposed the changes in July 2008 to reduce the variations in the price of tobacco in different national markets.

It said that these variations were a stimulus to illegal cross-border trade, as it was often cheaper for people to buy cigarettes that had been smuggled in from other EU countries than to buy those legally for sale. The Commission said that this trade undermined government attempts to wean people off smoking and helped to fund organised crime.

According to Commission figures, the amount of excise duty in 2008 per 1,000 cigarettes varied from €37.36 in Latvia to €249.99 in the UK. Excise as a percentage of total cost varied from 51.6% in Latvia to 77.6% in Slovakia.

Revenue losses

The UK government is believed to lose around £3 billion (€3.35bn) a year in tax revenue from tobacco smuggling. The Commission has estimated that 13% of all tobacco sold in the EU is sold outside the market where it is taxed.

The finance ministers failed in May to reach an agreement to raise minimum rates. Member states on the EU's eastern border were concerned that the move could encourage cross-border smuggling of cigarettes from Russia, Belarus, and Ukraine, where prices are much lower.

But diplomats said that these concerns had largely been addressed by a proposal from the Swedish presidency that Poland, Hungary, Slovakia, Romania, Bulgaria, Lithuania, Estonia, Latvia and Greece would be given until 1 January 2018 to apply the new rates, instead of the 1 January 2014 deadline for the rest of the EU.

This is more generous than the extension proposed by the Commission, which had suggested that Poland, Hungary and Slovakia should apply the new rates from the start of 2015, while Romania, Bulgaria, Lithuania, Estonia and Latvia should be given until January 2016.

Diplomats said that discussions between governments were now focused on temporary restrictions that should be placed on cigarette sales to foreigners in the countries that would benefit from the 1 January 2018 deadline.

Caps on sales

Some governments believe that caps on sales should be used to minimise the competitive advantage that countries with an extended deadline will enjoy.

A compromise text, drawn up by the Swedish presidency and discussed by national ambassadors yesterday (4 November), would allow member states to charge people extra excise duty at the border if they try to bring back more than 300 cigarettes from a country benefiting from the extended deadline.

The draft legislation needs unanimous agreement before it can be adopted.