The European Union’s member states overwhelmingly want harmonised tax policies across the EU for both e-cigarettes and heated tobacco.
A new study from the European Commission, published this week, shows that 15 out of 24 member states responding to questions about taxation of heated tobacco products would like the EU to designate a specific tax category in which they should be placed, and set a minimum rate. Member states would be permitted to tax higher than that minimum if they wished.
For e-cigarettes, 19 out of 23 wanted a harmonised category and rate.
Other options given, but largely rejected by respondents, included a harmonised category but no minimum rate; no policy at all; and non-binding guidance on taxation. For heated tobacco there was also the option of including products in an existing category.
At the time the research was conducted the EU had 28 member states (the UK has since left), meaning that respondents represent a substantial majority.
Lack of standardisation
The report, which reviews options for vapour and heated tobacco taxes as part of a larger review of Council Directive 2011/64/EU1 on tobacco taxation in general, acknowledges that since that directive there have been problems created by “disparities in the tax treatment of novel products across Member States”.
It says that “the lack of a proper definition and classification in the tobacco tax Directive of heated tobacco products and e-cigarettes, and in the future for next generation products is becoming an issue”, adding that the lack of standardisation creates problems for monitoring as well as tax revenue.
And it points out that current variations among member states in the ways e-cigarettes and heated tobacco products are taxed can create problems with cross-border trade. One of the goals of the report was to assess whether the 2011 directive ensures “the proper functioning of the internal market”.
Particular concern is expressed about the taxation of heated tobacco. The report’s authors suggest that “with other competing products with similar concepts being launched and other new generation platforms being developed, it is expected that the market will continue evolving rapidly in the near future” – potentially leading to even more chaos in tax policy if some harmonisation is not introduced.
They note, too, that the industry and consumers are more comfortable with the idea of heated tobacco taxation than with the prospect of higher taxes on vapour products: “The widespread concern among e-cigarettes stakeholders and consumers about the possible adverse effects of e-cigarettes taxation should be noted, although a significant share of operators would seemingly support a harmonised definition with no minimum rate attached to it. More consensus can be found on the need to harmonise heated tobacco products – a need that is supported by the industry itself to overcome the current legal fragmentation.”
The report also recommends that the definitions of new types of tobacco products used in formulating tax policy should be aligned with those introduced in the Tobacco Products Directive (TPD) of 2014.
Overall, it gives the 2011 taxation directive a mixed scorecard. Smoking prevalence overall has declined, it says, but not nearly as much as hoped – and tax levels are apparently not deterring young people as they switch to lower-taxed product types.
“The emphasis on the public health objective deserves better attention as taxation is recognised as the most effective tool to influence behaviour regarding the use of tobacco products,” it recommends.
Tobacco-specific taxes raised €83bn across the EU in 2016, with VAT accounting for a further €23bn. The total of €106bn, most of it coming from combustible cigarettes, represents about 2.7% of EU member states’ total tax revenue.
What This Means: This latest paper does not announce a decision, but it starts to fill in some of the gaps in the 2018 European Commission report on tobacco taxation. Back then, it was decided not to propose any revisions of the 2011 directive, given the lack of available information on a rapidly changing market.
Now, it appears the Commission is much more confident that it understands what is happening in the world of e-cigarettes and heated tobacco, and what the policy choices are.
It’s also evident that there is strong agreement among member states on the way forward – harmonisation of both categories and minimum tax rates for e-cigarettes and for heated tobacco.
– Barnaby Page ECigIntelligence staff