Presenting a Commission proposal to increase EU excise duties on tobacco, on 16 July, Taxation Commissioner László Kovács said the aim is to "narrow the differences in price levels of tobacco products within the EU" and reduce smuggling "which undermine the revenue and the health objectives of member states".
Commission studies show, for example, that in 2006 cigarettes were six to seven times more expensive in the UK than in Latvia and 13% of the tobacco consumed in the EU is not purchased in the country that is used. "4-5% of this comes from legitimate cross-border shopping and 8-9% from illicit trade," Kovács said, adding that in some countries the share of illicit trade is as high as 20%.
The Commission therefore proposes gradually increasing minimum tax levels on cigarettes and fine cut tobacco until 2014 to decrease tax differences and prevent illicit trade.
"In countries like Denmark or Finland, the price increase will be around 6%, and in countries like Poland it will be 46%. There is a huge difference," said the commissioner, acknowledging that it will mostly create problems in the new member states. These countries would therefore be granted one or two years extra time to comply with the directive.
Another aim of the proposal is to support the health objectives of member states, which impose high taxes to deter smoking. Price increases in tobacco products are, according to the World Bank, "the most effective single intervention in preventing smoking" as a 10% increase in prices decreases consumption by 4% on average.
Kovács hopes to see discussion on the proposal finalised by mid-2009 and the directive finally adopted by the end of 2009. The proposal is, however, likely to be subject to a heated debate as it needs to be adopted unanimously.