Luk Joossens
Consultant to the UICC
International Union Against Cancer
EU Liaison Office
Rue de Pascale 33
1040 Brussels - Belgium
Tel : + 32-2-230 20 27
Fax : + 32-2-231 18 58
On 19 October 1992 the European Council of Finance Ministers adopted three Directives on the approximation of taxes on cigarettes and other products. These Directives provide for a minimum harmonisation of the structure of tobacco in Europe, applicable as of 1 January 1993.The minimum rates set by these Directives should have been examined before 31 December 1994 and, from then onwards, every two years. The report by the Commission, the consultation of the European Parliament and the examination by the Council have to take into account the proper functioning of the internal market and the wider objectives of the Treaty.
So far the Commission produced its report with a nine months delay in September 1995 and the Parliament is expected to adopt its opinion in September 1996 . The consultation process has been unfair and may result in measures which are inconsistent and in contradiction with EU health policy.
From a health perspective , the following three recommendations
are essential for further action :
In this report we will first summarise the Commission report of September 1995 and then provide answers to the following questions :
In an article of the tobacco trade journal "Tobacco International" of December 1995, the history of the Commission proposals and of the industry lobbying is described in detail (1). The Commission had already drafted proposals in 1994, intended for the Member States and the Council. However, the draft was clearly seen by the tobacco industry, giving them an early opportunity to react and to influence events. After intensive lobbying, the Commission withdrew its proposals in July 1995, offering instead an Excise Conference for interested parties to be held in Lisbon. At this conference 42 representatives of the tobacco industry and only one of the health organisations were present. Despite several requests, health organisations were never informed by the Commission services of their initial proposals .
'Tobacco International' describes these events as a clear victory for the industry :
"Lobbying by national tobacco industries, muddled thinking by the bureaucrats in Brussels, and a weak college of Commissioners have all combined to consign to the dustbin the latest draft proposals by the EU Commission to raise minimum excise levels on cigarettes and roll-your-own (RYO) smoking tobacco " and "while the Commission was in the process of formulating its proposals, the tobacco industry could, and did, intervene-this time successfully".
According to article 4 of Directive 92/79/EEC two criteria are important in order to examine the existing excise duty for tobacco products:
According to the Commission report, the main issue for the wider treaty objectives is health protection. Article 129 of the Treaty of Maastricht stipulates :"Health protection requirements shall form a constituent part of the Community's other policies". According to the Commission report ,taxation of tobacco products is an obvious means of discouraging tobacco consumption.
What a tobacco price policy aims to achieve is an increase in the real price of tobacco products over and above the effects of inflation . The effect that an increase in real terms is likely to have , is measured in terms of price elasticity. According to a recent review of the literature of surveys in several countries, elasticities of demand for cigarettes or tobacco have varied between about -0.2 and -0.9 and have clustered about -0.5. This suggests that, on average, cigarette consumption reduces about 0.5 % for every 1 % increase in real price (2).
The relationship between real price and consumption can be illustrated by data on the consumption of cigarettes in the U.K. (1971-1994), France (1950-1989) and Belgium (1985-1995) ( see annexes ).
Over half a million people in the European Union died in 1995 from tobacco related diseases (3). It is clear from existing studies , that price has a significant impact on the consumption of tobacco products. Neglecting taxation as a tool to reduce consumption would be a clear infringement of EU health policy and a wilful disregard of the Treaty's wider objectives.
Under Article 99 of the Maastricht Treaty the Community is charged with pursuing the harmonisation of indirect taxes, such tobacco excise duties, only to the extent deemed necessary for the funtioning of the internal market.The question was whether differences in retail prices would lead to extensive cross border shopping by consumers, following the removal of frontier controls and the opening of the European Single Market in January 1993. Since 1993 consumers have been allowed to buy almost unlimited quantities of tobacco for their own use ( with suggested " limitative " levels, below which use is assumed to be personal but above which personal use must be proved , of 800 cigarettes, 1 kg fine cut tobacco, 400 cigarillos and 200 cigars )
In its review of cigarette excise tax, the Commission observed that despite the existence of large tax-induced price differentials between Member States, there has been no general increase in the level of cross-border shopping since frontier controls were abolished in 1993.
We share the same view. Sales in Luxembourg are a good example to prove this theory, as it has been estimated that 85 % of the cigarette sales were due to cross-border sales (4). However, since the opening of its borders in January 1993, there has been a decline in cigarette sales in Luxembourg : 4166 million cigarettes were sold in Luxembourg in 1992 and 3694 million in 1995.
There is no evidence that cross border shopping of cigarettes is an important problem in the Union. It could become a problem if there were large price differences for the same brand of cigarettes in neighbouring countries.
Council Directive 92/79/ EEC stipulated that each Member State should apply an overall excise duty ( specific and ad valorem combined ) of not less than 57 % of the final retail selling price of cigarettes of the most popular price category, all taxes included.
In the Commission report it was observed that the 57 % rule, "far from producing further rate approximation, could actually lead to increased rate divergence".
The Confederation of European Community Cigarette Manufacturers shared the same view: "With regard to the operation of the internal market , the existing 57 % formula is producing divergence rather than convergence" (5).
According to a report on the Lisbon Conference prepared for the European Parliament's Committee on Economic and Monetary Affairs, the increased rate divergence was considered as the major problem with excise duties on cigarettes". It was observed that the existing overall minimum rate of 57 % for cigarettes , far from producing convergence of rates, had perversely widened the differences between Member States" (6).
It is amazing that all these observations are based on wrong information.
It is not true that the gap between the Member States has been
widening. The contrary is true, as the gap between the cheapest
and the most expensive country has been reduced from 628 % in
January 1992 to 372 % in September 1996.
Retail selling price ( for 1000 cigarettes ) in ECUS of the
most popular price category in Spain and Denmark
in January 1992 and September 1996
While the real price of cigarettes in Denmark has almost not increased (+1 %) in the period 1985 -1994, the real price in the cheaper countries has increased in the period 1985-1995 with 34 % in Spain, 36 % in Portugal and 56 % in Greece.
Is there a specific problem for those countries, such as Belgium, the Netherlands or Austria, which are close to the 57 % threshold and which may be obliged to increase taxes in the case of an increase in the ex-factory cost ? The 57 % rule has stimulated price increases occasionally in some countries. These increases did not create internal market problems and are completely in line with the communication from the Commission concerning the fight against cancer, which states that "an upward harmonisation of tobacco prices across the Community" is among the actions which need to be continued and developed (7).
As there is no evidence to indicate that the 57 % rule has widened the difference between Member States or created specific internal market problems, there is absolutely no justification to drop this rule.
In March 1992 the European Parliament adopted a position which left the Member States the choice of complying either with the 57 % rule or with a minimum cash level of excise duty on cigarettes in the most popular price category of no less than 35 ecu per 1000 cigarettes.
In September 1996 all Member States comply with one or both rules. The implementation of the Parliament's proposal would mean that no Member State has to increase its taxes and that each Member State could eventually decrease its taxes. It would be in complete contradiction with the wish of those who favour an upward harmonisation of tobacco prices based on health considerations.
Like most goods, cigarettes are liable to Value Added Tax or VAT. Unlike other excise taxable items, however, they are subject to a mix of two types of excise duty - specific and ad valorem. Fixed or specific excise duties are imposed as a fixed amount per 1,000 pieces or per 1,000 grammes. Ad valorem excise duties are proportional to the final retail price.
The conflict between proponents of a predominantly ad valorem taxation structure and those who defend a high proportion of specific taxes is based on the differing effects of each of these taxation types on the cigarette market (8).
The higher the proportion of specific taxes in the overall tax burden, the lower the price differential will be between cheap and expensive brands (8).
From a health point of view, ad valorem taxation has the advantage that it automatically takes account of inflation, as taxes increase automatically in proportion to the price. Ad valorem taxation has the disadvantage that cheap cigarettes are possible due to the combined effects of very low production costs and proportional taxation.
Again from a health point of view, specific taxation has the advantage of removing the very cheap cigarette brands, but has the disadvantage that tax rates have to be increased regularly in order to take account of inflation.
In order to maximise the advantages of both systems, we are in favour of maintaining the existing proportional 57 % rule as it automatically takes account of inflation, but to combine it with a minimum specific tax. Specific taxation has the advantage of removing the very cheap cigarette brands and narrows the price gap between cheap and expensive cigarettes within countries, but also between countries.
For this reason, the EU should set the minimum tobacco tax level in ECU (at least 45-50 ECUs for 1,000 cigarettes) as well as in percentage terms.
The sum fixed in ECUs should be indexed every year in order to take account of inflation.
According to the tobacco industry, any increase in taxes will lead to an increase in smuggling and and a loss of revenue for governments.
The truth about smuggling in Europe is that smuggling is not caused by high prices and taxes. In the country with the highest price, Denmark, there is a little evidence of smuggling, while in Spain and in Central and East European countries, where prices are much lower, the illegal sale of cigarettes is widespread. The smuggling market in Europe is not the movement of cigarettes from the cheaper South to the more expensive North, but the (illegal) movement of duty free imported international brands from northern ports to the South and the East.
In fact, it is the tobacco industry which benefits most from smuggling, in different ways:
According to an answer of the Commission to a written question by Terry Wynn, MEP (26 February 1996) the Commission is aware of large scale re-shipments of American cigarettes following their initial importation into the Community, and especially of United States cigarettes entering Belgium. Priority has been given by the Commission to the reinforcement of customs control over such shipments whilst transiting Community territory. We believe that the Union cannot resolve this problem alone. The adoption of an international convention is probably necessary, as we need both the cooperation of the exporting countries, such as the U.S.A., and that of known transit countries for cigarettes at the border of the Union ,such as Cyprus and Switzerland.
According to the Commission report, there is a problem of smuggling of hand-rolling tobacco between the high price countries such as Ireland and the United - Kingdom and the low price countries such as Belgium and the Netherlands.
The Commission is not very consistent in describing the smuggling problem of hand -rolling tobacco. It is known that the market of hand-rolling tobacco is limited in the UK (around 3,000 to 4,000 tons). According to the Commission, illegal sales in the UK have been estimated to account for around 5 % of the total sales of hand-rolling tobacco" (p 18, section 4.6). 5 % of a small market does not seem to be a major problem. Nonetheless, on the same page (p 18, section 4.8) the Commission observes "to the extent that this situation is giving rise to considerable fraud", which means that the smuggling problem is again a major problem according to the Commission.
However, looking at the sales figures of smoking tobacco in Belgium,
France, the Netherlands and the United Kingdom during the period
1992 - 1995 , it is difficult to conclude that smuggling of hand-rolling
tobacco is a major problem.
Sales of smoking tobacco in the U.K., Belgium, Netherlands
and France in 1992 and 1995
| UK | |||
| Belgium | |||
| Netherlands | |||
| France |
There is a problem of smuggling for hand rolling tobacco between the U.K. on the one side and Belgium and France on the other side, but the problem is rather marginal for the proper functioning of the internal market , as it involves only a minor quantity of tobacco (one or two thousand tons).
If the problem is only minor, the solution of the Commission to resolve it, raises concern. According to the Commission, "any proposal to address this situation solely by adjustment of the minimum rate would require so large an increase as to be unrealistic" and " At face value, therefore, it would appear that it is essentially a matter for high taxing Member States to tackle, through reducing their national rates and/or improved control measures". In other words, no proposals to increase the price of hand-rolling tobacco in low price countries but a suggestion to decrease the price in high price countries.
We believe that the main problem is that hand-rolled cigarettes in most Member States are taxed at a lower level than manufactured cigarettes. European Directives request a minimum excise duty of 57 % of the retail price for cigarettes , but only 30 % for hand-rolling tobacco .
So far the lower rate has produced a widening gap between the sale price of hand-rolling tobacco and manufactured cigarettes of the same brand name.
For instance, RJ Reynolds has launched hand-rolling Camel tobacco in several EU countries . The selling price varies substantially from one country to another :
Selling price in ECUs of Camel cigarettes and hand-rolling tobacco (January 1996)
| Country | ||
| Belgium | ||
| Germany | ||
| Netherlands | ||
| UK |
From a health point of view, it is unacceptable that the same Camel tobacco is taxed lower as RYO tobacco than as manufactured tobacco. This is not the case in the UK where the price of 1,000 Camel cigarettes is 174 ECU and the price of 1 Kg Camel tobacco 172 ECU.
As a first stage, it should be attempted to bring the level of taxation for rolling tobacco to the same level as the present minimum level of taxation for cigarettes. This mean that the U.K and Ireland should maintain its tax level for hand-rolled cigarettes and other countries should increase It.
Teenagers are very sensitive to price increases. This is explained by the fact that they are less addicted and have a lower disposable income. In Canada, data from the period 1979-1994 clearly demonstrates the effects of the real price of tobacco on teenage smoking .During the period 1979-1991 the real price of cigarettes increased by 159 % and teenage smoking fell from 42 % to 16 %. In 1994 the real price fell by one third and teenage smoking increased from 16 % to 20 % (see annexe). Price is not the only factor which influences youngsters. Advertising and brand image are also important. Despite their lower disposable income, teenagers prefer to smoke the more expensive, highly advertised, glamourous international brands rather than the cheaper national brands. In the same way, youngsters prefer to start smoking with manufactured cigarettes rather than with hand-rolled cigarettes. In the Netherlands 67 % of the youngsters in1996, aged ten to twelve, smoke only manufactured cigarettes, 5 % only hand-rolled cigarettes and 28 % both kinds of cigarettes. However, at the age of 15 to 19, 46 % smoke manufactured cigarettes, 19 % hand-rolled cigarettes and 35 % both kind of cigarettes (9). Due to their low price hand-rolled cigarettes play an important role in establishing the smoking habit among youngsters. In principle young smokers prefer manufactured cigarettes, but hand-rolled cigarettes reinforce the habit by offering the possibility of switching to a cheaper substitute when there is a financial need for it. From a health perspective it is crucial to ban all advertising in order to make cigarettes less attractive and to increase the price of all tobacco products (including hand-rolled cigarettes) in order to make them less affordable.
The tar yield of manufactured cigarettes is regulated by Community Directives but not the tar yield of hand-rolling tobacco. The Directive states that the tar content of cigarettes should not exceed 15 mg per cigarettes as of 31 December 1992.
Two studies have shown that the tar yield of hand-rolling tobacco is much higher than the 15 mg per cigarette.
If it is true that the same tobacco is used for hand-rolled and manufactured cigarettes , than it is also true that hand-rolled cigarettes are as dangerous as manufactured cigarettes and should not be taxed at a much lower level. The absence of filters in most hand-rolled cigarettes remains however an unchallenged health risk, which reinforces the need for a higher tax rate on hand-rolling tobacco.
Annex 1 : The real price of cigarettes and the per capita consumption
of cigarettes in Belgium in the period 1985-1995
| Year | Real price of cigarettes
1985 = 100 | Per capita consumption of cigarettes 1985 = 100 |
| 1986 | 106.6 | 97.0 |
| 1987 | 110.1 | 90.4 |
| 1988 | 109.8 | 93.2 |
| 1989 | 113.1 | 87.6 |
| 1990 | 118.2 | 84.6 |
| 1991 | 117.5 | 85.4 |
| 1992 | 126.4 | 82.6 |
| 1993 | 133.1 | 76.5 |
| 1994 | 142.7 | 73.5 |
| 1995 | 146.0 | 75.4 |
Source : L. Joossens, BASP.
Annex 2 : Teenage smoking and the real price of cigarettes
in Canada
| Year | Daily smoking
15-19 year olds | Real price of cigarettes
1981 = 100 |
| 1979 | 42.00 % | 99.70 |
| 1980 | 99.00 | |
| 1981 | 39.50 % | 100.30 |
| 1982 | 104.10 | |
| 1983 | 34.50 % | 115.70 |
| 1984 | 123.60 | |
| 1985 | 139.50 | |
| 1986 | 22.50 % | 157.40 |
| 1987 | 163.70 | |
| 1988 | 170.00 | |
| 1989 | 190.80 | |
| 1990 | 207.80 | |
| 1991 | 16.00 % | 259.00 |
| 1992 | 276.80 | |
| 1993 | 274.80 | |
| 1994 | 20.20 % | 169.50 |
Sources :
Annex 4 : The real price and consumption in France, 1950-1989
Annex 5: Tar and nicotine yield in hand-rolled tobacco in the Netherlands
Source : Inspectie Gezondheidsbescherming, Alkmaar,
1993.
Annex 6 : Tar and nicotine yield in hand-rolled and manufactured cigarettes in Norway (1994)
Source : National Council on Tobacco and Health,
Norway, 1994.