The impact will be especially marked in eastern Europe, where governments have been given additional time to implement hikes in excise duty. Following a fourth, four-yearly review of EU excise tobacco rules, the EU Council of Ministers has now approved a new directive on minimum tobacco taxation. It will update existing directives 92/79/EEC, 92/80/EEC and 95/59/EC.
A council communiqué said: “The directive is intended to ensure a higher level of public health protection by raising minimum excise duties on cigarettes, whilst bringing the minimum rates for fine-cut tobacco gradually into line with those for cigarettes.” It added that it is “aimed at modernising and simplifying the rules and making them more transparent”.
There are, of course, some key issues here. First is the increase in cigarette taxation. Ministers agreed to increase, by 1 January 2014, the monetary minimum excise rate to EUR 90 per 1,000 cigarettes and the proportional ad valorem minimum to 60 per cent of average sales prices. This is a significant jump from the present EUR 64 per 1,000 sticks and 57 per cent ad valorem. Because this is no token increase, the council is giving member states that have yet to increase rates to the existing minimums until January 2018 to reach the new duty floors. These countries are Bulgaria, Greece, Estonia, Latvia, Lithuania, Hungary, Poland and Romania.
Thought has also been given to prevent cross-border shopping being promoted by these temporary discrepancies. Member states that must implement the new minimum by January 2014 will have the right from that date to impose a 300-stick limit on the number of cigarettes that may be brought into their territory from member states with lower duties. Furthermore, these powers have been given to those countries with the 2018 deadline once they levy EUR 77 per 1,000 cigarettes – they can then slap a 300-stick limit on laggard member states with rates below this level. In last minute negotiations, ministers also agreed some additional flexibility. From January 2014, member states levying duty of at least EUR 115 per 1,000 cigarettes may ignore the 60 per cent ad valorem requirement.
Impact analysis
The impact on demand of these increases will of course be hard to predict, but it is worth noting that before these decisions, some very detailed analysis was undertaken by the European Commission and released as a working paper (in 2008). This bears examination, given this was the advice upon which ministers ultimately took their decisions. It concluded that “increases (especially over 60 per cent) could significantly increase the price competition between the different price categories of cigarettes”.
And while an increase to EUR 90 would “more or less consolidate” prices in Luxembourg and Portugal, it would increase cigarette prices by more than ten per cent in Greece and the newer southern and eastern European member states.
Projected increases would be: Slovenia 23 per cent, Slovakia 36 per cent, Poland 47 per cent, Lithuania 33 per cent, Latvia 29 per cent, Hungary 29 per cent, Estonia 28 per cent, the Czech Republic 30 per cent, Bulgaria 36 per cent, Greece 22 per cent and Spain seven per cent.
This paper warned, of course, that member states could still levy higher rates than the minimum and the hike “would pave the way for further increases of excise duties on cigarettes [including] those member states which already have a high level of taxation”.
Considering the available purchasing power in EU countries, even increases under EUR 90 on (and admittedly higher ad valorem increase of) 63 per cent would render cigarettes “over expensive in Bulgaria (and probably also in Romania for which no data are available)”, noted this report. Cigarettes would also be “relatively expensive in Poland, Lithuania and Latvia”. That said, cigarettes “would stay relatively cheap in Spain and Greece”, despite the increases.
The other key issue in the new EU tax package is increased minimum excise duty for fine-cut tobacco. Here, member states have to comply with either ad valorem or monetary minimums. These will rise on a sliding scale: 40 per cent of average sales prices/EUR 40 per kg by January 2011; 43 per cent and EUR 47 per kg by January 2013; 46 per cent and EUR 54 per kg by January 2015; 48 per cent and EUR 60 per kg by January 2018; and 50 per cent and EUR 60 per kg by January 2020.
The aim here is to prevent consumers shifting from cigarettes to fine-cut tobacco because of differential taxation. The commission working paper argued that tax-induced distortions of competition would otherwise “undermine health protection objectives” and “maintain cross-border shopping”, causing some member states to have higher health service bills, while others reaped fiscal rewards from lower tax rates. But this new minimum rate for fine-cut tobacco may well go further and slash demand. The working paper research admitted as much: “Assuming the same price elasticity as for cigarettes, an increase of the minimum requirements to EUR 60 and 42 per cent would trigger a reduction in demand of around 20 per cent in 19 member states,” it predicted.
Keith Nuthall
| 
