Tobacco firms plead for tax equality

By Aoife White

Date: 07/07/05

Cigarette prices vary hugely across Europe - from Û13 for a pack of 200 in Latvia, the EU's cheapest market, to more than Û200 in the UK at the top of the scale.

Tobacco firms are pleading for equality. "People tend to think Europe is an internal market for cigarettes. There is no internal market because of different tax levels, there is no free flow of goods, there are different language requirements for packaging," says Maarten Bevers, corporate affairs vice-president for Japan Tobacco International (JTI), the fifth largest cigarette manufacturer in Europe.

He stresses that the industry accepts that it is taxed separately for health reasons but criticises the current system because it creates major distortions such as smuggling, counterfeiting and the emergence of niche products in lower-tax categories. He also claims current measures, such as the most popular price category which sets the average tax, allows dominant cigarette firms to manipulate prices, making it more difficult for smaller companies like his to compete fairly.

Next year, the European Commission will submit its regular report to the Council of Ministers on what it thinks should be done to the structure and rates of excise duty levied on cigarettes and other tobacco products. The Commission has no power to set tax rates; all it can do is advise member states on the problems it sees. And it sees "considerable differences between member states which may disturb the operation of the internal market".

These differences keep customs barriers in place for travellers buying cigarettes in Latvia and taking them to the UK.

The battle against smoking gives EU and national regulators the moral authority to charge a 'sin tax' on a product it knows is the largest single cause of death and disease across the Union.

David Davies, corporate affairs vice-president for Philip Morris International (PMI), says excise tax is a powerful tool for health policy. "If governments are serious in trying to reduce the harm caused by smoking, they have to have a comprehensive approach that covers regulation, fiscal policy and trade to address the illegal market, which is predominantly counterfeit," he says.

He condemns tax structures which levy lower tax on products such as roll-your-own tobacco or the do-it-yourself cigarette assembly of empty paper filters and compact tobacco portions.

"They enjoy a huge tax benefit and are cheaper. As a result of the inconsistency of regulation and the disparate tax levied on these other products, what you are seeing in Europe is a shift in demand from manufactured cigarettes to these other products - as well as a shift to counterfeit products which are a huge and growing problem in Europe today," he says.

Both PMI and JTI sell these alternative products but both claim they were forced to join these rapidly expanding markets for commercial reasons. "If you can't beat them, you have to join them," says Bevers. Both say they would like to see equal taxation for these market segments and mainstream cigarettes.

Their main brands would not be the only ones to benefit from equalising taxes. Governments are losing revenue with these cheaper products, consumers are being cheated when they buy poor quality counterfeit cigarettes and the availability of cheaper cigarettes does nothing to help public health goals.

"Clearly if you encourage cheap products to be sold, there is a greater risk more young people will smoke," says Davies.

"We know that the single greatest weapon for reducing consumption is the use of taxation, provided you do it uniformly."

Article looks at the incomplete internal market for cigarettes and other tobacco products, with huge differences in tax and price levels across the European Union.